In the year 2026, the Indian stock market seems to be at a very strange turning point. On the one hand, there is a huge pressure on the shares of the big companies of the country, on the other hand, the small companies are constantly gaining momentum. If we look at the figures, this year Nifty has witnessed a massive decline of around 14%. In contrast, the Nifty Midcap 150 index fell a mere 2%, while the Nifty Smallcap 100 index gained 8% and the Nifty Microcap 250 index gained 15%.

The main reason for this large difference is aggressive selling by foreign investors. Foreign institutional investors have this year withdrawn from the Indian market a record Rs. 2.8 lakh crore shares have been sold. This heavy sell-off has had the biggest impact on large cap stocks.

Huge opportunity in largecap, valuation at 2020 level

This upheaval in the market has led to a situation where large-cap stocks, which were the weakest performers in recent times, are now offering investors the safest opportunity. DSP Mutual Fund has termed this market segmentation as a major contradiction. Anish Tawaklay, Chief Investment Officer, DSP Mutual Fund, says that the risk-reward equation is completely in favor of large caps at present. He believes that instead of chasing the recent boom, investors should invest money in sectors that have lagged behind in the past few years.

According to brokerage firm Nomura, the Nifty 50 is currently trading at a PE ratio of 16.9 against its one-year forward expected earnings. This level is below the range of 17 to 22 after the corona epidemic. For the first time since the corona crisis of June 2020, Nifty has come to such a cheap valuation. Nomura cut the Nifty’s valuation multiple to 17 from 18.5 and set a target of 24,000 for March 2027.

According to Alok Aggarwal, Deputy CIO, Alchemy Capital Management, the PE of Nifty was 21.5 in September 2024, which has come down to 17.4 in September 2026. During this period, the index fell by 11%, while the companies’ earnings continued to rise. Alok Aggarwal says current prices are perfectly reasonable and better returns in the long run usually start at such levels. According to DSP data, the Nifty 100 is available at a discount of 12% to its five-year average PE.

Big Risk in Smallcap, Will Old History Repeat?

As compared to large caps, the situation of small companies is very worrying. Nomura’s report shows that the Nifty Smallcap index is running at a PE ratio of 23.7. This is much higher than the range of 14-15 before the pandemic. Smallcap’s 39.3% premium over the Nifty 50 is the highest in the last decade. DSP data shows that the Nifty Smallcap 250 index is trading at a PE of 33 and the Nifty Midcap 150 index is trading at a PE of 27.6.

DSP clearly says that small companies now have to show excellent results to justify their high value. If the results are even slightly weaker than expected, a large reduction may occur. Over the past one year, smallcaps have outperformed the Sensex by 21.5% and midcaps have outperformed the Sensex by 14.1%. History shows that whenever such a large gap has occurred, the market has followed it with a sharp correction. Even in the years 2007, 2010 and 2017, when smallcaps reached such highs, smallcaps fell sharply by 30% and midcaps by 21% in the next 24 months.

Defensive sector shines in cheap, cyclical stocks

Another aspect of the current market is the changed mood of the sector. Generally, private banks, IT and FMCG companies that manufacture daily goods are considered safe. In the market, these sectors always fetch around 70% premium over cyclical stocks. But now this historical premium is completely gone. Such a difference was last seen during the boom of 2007.

DSP’s sector analysis shows that returns in IT, private banks, FMCG and financial services have completely washed away their previous records. On the other hand, cyclical sectors like government banks, capital goods, infrastructure and telecom are trading above their old averages. Nomura also found that valuations in the financial, IT and consumption sectors have fallen sharply. Nomura’s stance is positive on financials and IT, while he advises caution on the consumption sector.

A suitable profit plan for long term investors

In such a market which path should the common investor choose? Nomura advises that investors should avoid simply running on hype. Investors should focus on sectors where valuations are cheap and businesses are strong. The brokerage firm has identified auto accessories, engineering, pharma, power equipment, data centers, power infrastructure and AI-based IT services as its favourites.

If an investor wants to stay in midcap and smallcap, he need not exit the market completely. Anish Tawakle advises that in such times it is better to invest only through an experienced fund manager. Alok Aggarwal believes that investors with at least a seven-year vision and the ability to withstand recessionary shocks can hold 35% to 50% of their total equity portfolio in midcaps and smallcaps. But this decision should be made not on the basis of possible return, but on the basis of the ability to bear the decline.

The current market risk and reward equation seems to be clearly in favor of large caps. Small companies have no margin for error. In such a scenario, the real wisdom is not to run after stocks that are already running high, but to identify strong large-cap companies where the full impact of overseas sales has already been absorbed into prices.