Is the tide about to turn for large caps?

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It’s been a volatile year for the Indian stock market, and the reasons are no secret. Trade tensions, the war in Iran, supply disruptions, rising crude oil prices, a falling rupee – the list of investors’ concerns is long.

These concerns have resulted in predictable market behaviour – avoiding the index. If the market is unlikely to go up, the thinking goes, then don’t invest in the Nifty 50.

The outcome of this behaviour is a mostly flat index, a trend that dates back to 2024, as this chart shows.

Does this mean Indian investors have abandoned the stock market? Not at all. Mutual fund flows remain strong and retail investors continue to participate, easily absolving the selling by foreign institutional investors (FIIs). These two opposing forces may have cancelled each other out when it comes to large caps, but what about the rest of the market?

Well, the picture is markedly different in mid and small caps.

The BSE Smallcap 250 index is trading close to its 52-week high and the BSE Midcap 150 recently hit a new 52-week high.

This shows the broader market is not reflecting the concerns of an economic slowdown. That’s because retail investors have continued to invest in the market. The correction in the first half of 2026 made many mid and small caps more attractively valued, creating opportunities for investors waiting on the sidelines, ready with their watch lists.

But why have mid caps and small caps been so resilient? When the news is dominated by major geopolitical events and sensational headlines, it's easy to assume that the entire stock market will be negatively affected. This is not true. Often, small companies are not as badly affected by macroeconomic developments as large companies because of their limited scale.

Of course, this is not always the case. Small firms aren't completely insulated from macroeconomics. But the stock market has realised that many mid caps and small caps haven’t been as badly affected by recent events as initially thought.

So, does this mean large caps will continue to underperform? No. In fact, investors should be prepared for a resurgence in large caps.

Stock markets move in cycles. What goes up will eventually come down and vice versa. This is a function of both fundamentals and sentiment.

The fundamentals of Indian large caps are mostly good. There is no major debt problem among such companies. Growth prospects are good. Margins haven’t collapsed. Companies aren’t suddenly reporting losses and layoffs compared to profits last year.

While growth may be slow, and there are serious challenges in some sectors such as IT and energy, the large cap space as a whole is doing fine. And when the war in the Middle East ends, these companies will see revenue and profits pick up. Another potential positive trigger for large caps could be a trade deal with the US, which has been under discussion for a long time.

Speculation in mid caps and small caps may deliver short-term profits, but carries significant risk.

Your watch list should contain large caps that are fundamentally strong but have suffered a correction due to changes in short-term sentiment. To get started, you can check out Equitymaster’s screener on the Top Largecap Companies in India.

Large cap valuations are currently reasonable, with the Nifty’s price-to-earnings (PE) ratio at 21. The smart money tends to invest significant amounts when it’s below 20, due to a perceived margin of safety at this valuation.

However, this doesn’t mean you can just buy any large cap stock. Check for the following factors:

Also, beware of narratives. The market can be carried away by certain trends for a while, which drives up valuations of some stocks. But eventually the fundamentals have their say, and when that happens, large caps that perform poorly compared to their peers will find themselves left behind.

Investors should evaluate a company's fundament...