Every few years, the market sends us a quiet signal, one that most investors miss because they’re too busy staring at the headline indices. And right now, that signal is flashing again.
We’ve just watched the Nifty scale 26,000 and the Sensex cruise past 86,000, both brushing fresh all-time highs. The headlines are celebratory. But if you check your portfolio, the story likely feels very different. There’s no euphoria, no fireworks maybe even a tinge of red. And that disconnect itself is the message the market wants you to hear.Because when you look beneath the glitter of new highs, you will realize this rally is not broad based. It is a classic, historical, textbook case of large caps quietly reclaiming leadership, with mid-caps and small-caps taking a breather after two years of excess.
I’ve watched this cycle unfold many times over the last two decades. The pattern rarely lies. When risk appetite contracts, liquidity gets cautious, valuations stretch, and uncertainty rises, money instinctively migrates toward safety. And in Indian equities, “safety” has always meant the same thing—large caps with deep liquidity and stable earnings.
Look at the numbers
In the past eight months, Nifty has rallied 17.4% from its April 2025 lows. But nearly 63% of this move has come from just the top 10 stocks. Giants like Reliance Industries, HDFC Bank, SBI, Bharti Airtel, L&T and others have done all the heavy lifting, while broader market segments have barely budged. The Nifty Micro cap 250 is down 10%. The Small cap 250 is down 9%. Micro caps and Small caps which house the bulk of retail ownership have simply not participated.The Small cap 250 is down 9%. Micro caps and Small caps which house the bulk of retail ownership have simply not participated.
Meanwhile, the CNX100/CNX Small cap ratio has bounced cleanly off its long-term support trendline, a level that has historically signaled the beginning of major phases of large cap outperformance. In 2008, this support preceded an 80% relative outperformance by large caps. In 2018, it triggered a 105% swing in favour of the big boys. The same level was revisited in early 2025, and the trend since then has been unmistakably familiar.Valuations tell the same story
Currently, Mid caps trade at 25x forward earnings above their 10-year average of 23. Small caps at 23x far above their long-term average of 18. These are levels where institutions hesitate and retail investors get nervous. Pair that with heavy FPI selling of Rs 2.67 lakh crore dumped in 2025 and you get a market where money naturally gravitates toward stability.
And then comes liquidity. The new Fed Chair is expected to accelerate rate cuts in 2026. Lower global rates mean one thing: a gush of liquidity into emerging markets. And if money flows into India, at a scale, then it will probably hit the most liquid counters first, which are large caps. It’s only later, much later, that it trickles down to the mid and small cap universe. Put all these pieces together, and the picture is unmistakable.
We are at the beginning of a phase, that history has shown repeatedly, where large caps lead, steady, and stabilize the market, before the baton eventually passes down the ladder.For now, if you’re an investor, resist the temptation to chase beaten down small caps. This is the phase to anchor your portfolio in quality. Let the market’s giants continue do the heavy lifting.
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### Why the Next Market Upswing Will Belong to Large Caps
As of December 7, 2025, Indian equity markets are at a pivotal juncture, with the Nifty 50 hovering near all-time highs amid moderating inflation and anticipated policy easing. Experts from brokerages like Bank of America (BofA), ICICI Prudential, and Invesco Mutual Fund argue that the anticipated rally into 2026—potentially pushing the Nifty to 29,000 (an 11-12% upside)—will be led by large-cap stocks. This shift comes after a year where mid- and small-caps dominated gains but now face stretched valuations (trading at 25-30x forward earnings vs. large caps at 20-22x). Below are the key reasons, drawn from recent analyses.
#### 1. **Reasonable Valuations Amid Overheated SMIDs**
Large caps are trading at more sustainable multiples, offering better risk-reward compared to mid- and small-caps, which are vulnerable to sharp corrections if earnings disappoint. BofA expects large caps to outperform as small- and mid-cap (SMID) valuations normalize, similar to global trends where quality names lead narrow rallies. This makes large caps a safer bet for the "Santa Claus rally" in December 2025 and beyond, especially until clarity emerges on US tariffs and geopolitics.
#### 2. **Sustained Earnings Acceleration and Stability**
A broad-based 12-15% earnings growth is crucial for the next leg up, and large caps—particularly in banks, financials, IT, and select consumer sectors—have shown resilience with steady delivery. Invesco's Taher Badshah highlights that while mid/small caps offer alpha through high growth, large caps provide the stable foundation for a meaningful rally, backed by improving corporate earnings cycles into FY26-27. Deven Choksey of KR Choksey adds that controlled costs (e.g., energy for commodity firms) are boosting margins, setting up 15-20% upside in underperforming Nifty 50 names.
#### 3. **Consumption Recovery Driving Demand**
Early signs of value-led consumption and rural demand revival—fueled by falling inflation, lower interest rates, and rising rural incomes—are favoring large-cap leaders in FMCG, autos, and NBFCs. Badshah notes a shift from premiumization to affordable segments, with rural acceleration expected in early 2026. Choksey points to NBFC winners like Bajaj Finance, benefiting from fintech/AI adoption and strong loan growth, alongside telecom plays like Bharti Airtel amid ARPU gains.
#### 4. **Supportive Macro and Policy Backdrop**
A favorable 2026 calendar includes potential RBI rate cuts (25-50 bps), US Fed easing, fewer state elections, and benign liquidity from steady domestic inflows (SIPs hitting record highs). This environment supports large-cap stability over volatile SMIDs. Geojit's Vinod Nair and ICICI Prudential's Anish Tawakley emphasize large caps' lower downside risk in uncertain times, recommending measured exposure to mid/small caps only where earnings justify premiums.
#### 5. **Global and Sectoral Tailwinds**
With India's GDP growth projected at 6.5-7% for FY26, large caps in export-oriented sectors like IT and pharma stand to gain from a weaker rupee and normalizing global trade. BofA flags Bank Nifty as a leader, driven by credit growth and deposit mobilization, while broader liquidity and GST/income tax reforms provide policy ballast.
In summary, while mid/small caps may offer tactical opportunities, the consensus is clear: large caps' blend of stability, earnings reliability, and macro alignment positions them to capture the bulk of the next upswing. Investors should focus on quality names in financials, consumption, and tech, but always align with personal risk profiles—markets remain volatile ahead of Q3 earnings. For real-time updates, monitor Nifty large-cap indices.
