Market Polarization Deepens: Why Large Caps Are Outperforming Mid, Small Caps

The report stated, "Given that large caps stay cheaper than broader markets on relative valuations, we believe polarization in equity markets may continue to increase".Polarisation in the equity markets means that gains are being driven mostly by a few large companies, while the broader market, which includes mid-cap and small-cap stocks, is not performing as strongly.

In simple terms, the gap between the performance of large companies and the rest of the market is increasing, and this trend may continue.

The report highlighted that most gains this year have come from select large-cap stocks and sectors, while a large portion of listed companies have lagged the benchmark indices.Indian equities performed well in November with Nifty delivering a return of 2 per cent and Sensex returning 2.2 per cent.

However, the performance weakened as one moves down the market capitalization curve. The Nifty Midcap 150 recorded a return of 1.7 per cent while the Nifty Smallcap 250 declined by -3.3 per cent in the same month.

On a year-to-date (YTD) basis till November, the divergence is even more visible. Nifty returned 12.4 per cent and Sensex delivered 11.2 per cent, compared to just 6.8 per cent for Nifty Midcap 150 and -5 per cent for Nifty Smallcap 250. This suggests that broader markets have not kept pace with the rally in large-cap stocks.

The report shared that the performance beneath the surface also signalled weak market breadth. In the BSE 500 universe, two-thirds of the stocks have underperformed the index on rolling 12-month returns.

This means a majority of companies are delivering lower returns than the overall market, despite headline indices showing positive momentum.

From the earnings perspective, the recently concluded quarterly season pointed to weak but in-line corporate performance.

Among Nifty companies, metals, NBFCs, capital goods, cement, and telecom sectors recorded healthy profit growth. However, weakness in private banks results and a drag from Oil & Gas (excluding OMCs), automobile, consumer, and insurance companies put pressure on overall profitability.

Meanwhile, global equity performance data shows India has stayed an underperformer this year amid expensive starting valuations and weak earnings.

The report indicates MSCI India gained only 3.6 per cent, and India's Nifty reported a 6 per cent YTD return in US dollar terms. In comparison, markets such as Sri Lanka (35.6 per cent), Pakistan (43.7 per cent), Brazil (52.1 per cent) and Korea (63.9 per cent) posted significantly higher returns.

With large caps still cheaper relative to mid and small-cap segments, the report noted that polarization may deepen further.

So, unless earnings improve more broadly, only select large companies may continue to drive equity market returns.

- ANI