Large-cap stocks underperformed mid and small-cap indices in Q1 FY27, hurt by foreign investor selling and lower earnings growth. However, analysts expect a turnaround in the second half of the fiscal year, driven by attractive large-cap valuations and a favorable base for earnings comparisons.
Large-cap stocks have faced a challenging start to the 2027 fiscal year, trailing behind their mid-cap and small-cap counterparts in both market returns and earnings performance. Year-to-date, the Nifty 50 index has declined by 7%, while the Nifty Midcap 100 and Nifty Smallcap 100 indices have recorded gains of 5% and 12%, respectively. This performance gap is largely attributed to persistent foreign portfolio investor (FPI) selling, which tends to hit large-cap stocks more significantly as they are the primary vehicles for institutional money.
Earnings and Valuation Context
The earnings data for the June quarter further illustrates this divergence. According to industry data, large-cap firms reported earnings growth of 21% year-on-year. In comparison, mid-cap companies grew by 23%, and small-cap companies outpaced both with 31% growth. While large-caps have shown slower expansion, their valuation metrics now appear more attractive compared to historical averages. The Nifty 50 is currently trading at a price-to-earnings (P/E) ratio of approximately 20 times, which sits below its five-year historical average of 24 times.
Conversely, mid-cap and small-cap indices are trading at a substantial premium. The Nifty Midcap 100 trades at roughly 33.7 times earnings, closely aligned with its long-term average, while the Nifty Smallcap 100 trades at around 31 times earnings, exceeding its historical average of 27 times. This valuation gap suggests that while mid and small-caps have enjoyed strong retail interest and mutual fund inflows, they are now priced for high expectations. Investors should be aware that if these smaller companies fail to meet these high earnings growth expectations in the coming quarters, they could be vulnerable to a price correction.
Outlook for Second Half of FY27
Market analysts remain optimistic about a potential catch-up rally for large-cap stocks in the second half of the fiscal year. Several factors support this outlook, including an improving domestic macroeconomic environment and a more favorable base effect from the previous year. Last year, large-cap earnings were affected by specific global disruptions, such as U.S. tariff-related issues, which are expected to ease. Additionally, domestic variables such as monsoon patterns are projected to normalize, which could provide stability to the broader economy.
For investors, the key monitorables moving into H2 FY27 will be the trend in FPI flows and whether large-cap earnings growth begins to accelerate as analysts predict. While the current valuation premium of mid and small-caps does not guarantee an immediate correction, it makes large-caps a more defensive and potentially appealing option for those concerned about high valuations in the broader market. The ultimate recovery will depend on whether large-cap firms can demonstrate stronger earnings growth and whether geopolitical or macroeconomic volatility remains contained.