Data from ACE Equity shows that 320 of the NSE 500 stocks have yet to reclaim their record highs in 2025, with several stocks considerably away from the record highs scaled during the 2024 frenzy—highlighting the stark contrast between headline index strength and individual stock performance.
V K Vijayakumar, Chief Investment Strategist at Geojit Investments, says the fresh records set by the benchmark indices mask a deep divergence. “These are new records driven by a narrow rally in a limited number of performing largecaps,” he said. Most retail investors, particularly those who rushed into markets after the Covid crash, are holding portfolios showing losses because of their obsession with smallcaps and the belief that they will outperform irrespective of valuation, he added.
For them to participate meaningfully in any 2026 rally, the shift must be toward largecaps and quality midcaps with earnings visibility. “This huge underperformance is primarily due to the poor earnings growth and high valuations of this segment. Smallcaps, in general, are likely to continue underperforming in the short to medium term.”
The narrowness of the rally is partly structural. Eight stocks — HDFC Bank, RIL, ICICI Bank, Bharti Airtel, L&T, ITC, Infosys and SBI — alone account for 50% of the Nifty’s weight. When five or six of these heavyweights move up, the index rises, regardless of broader market weakness. This dynamic has defined the current record-breaking run.
Meanwhile, several major names remain far off their peaks. TCS is still about 31% away from its all-time high, and Coal India is 43% away from its peaks. Among Adani Group companies that hit their zenith in 2022, some, for instance Adani Enterprises, remain up to 45% away their record. Pure-play EV major Ola Electric is 78% away from its record high of Rs 157.40 it claimed in August 2024.
“The mood is not very buoyant. Retail portfolios are stuck in midcap and smallcap stocks,” said Sunny Agarwal of SBI Securities, adding that broader participation will recover only when primary market supply cools. But with a strong IPO lineup in December, relief may still be some time away, he told ETMarkets earlier. Investors should avoid getting swept up by index-level optimism, says Mehul Tapse. “Guard against over-enthusiasm or FOMO buying, as the rally continues to be narrow. A large part of the mid- and small-cap universe remains in a corrective or fragile zone despite headline indices hitting all-time highs.” A selective, quality-first approach is the need of the hour, he added.
What’s next?
Despite the divergence, experts maintain that the bull market remains intact. India is still the best-performing market globally. The challenge, they say, is earnings. After a strong 24% CAGR in earnings from FY21 to FY24 propelled the Nifty from the Covid low of 7,511 to 26,216 in September 2024, growth fell sharply to 6% in FY25, eroding fundamental support.
Now, a recovery is underway. Earnings growth is likely to improve to around 10% in FY26 and about 15% in FY27. “The earnings growth will be led by largecaps and some quality midcaps. Nifty has the potential to move up towards 30,000 by end-2026. Smallcaps are likely to disappoint again,” Vijayakumar said.
Valuations, however, remain a point of caution. Largecaps are fairly valued but not cheap. Nifty Midcap 150 trades at about 32 times earnings and the Nifty Smallcap 250 at 28 times, compared with 22 times for the Nifty 50. While midcaps still have some earnings support, smallcaps’ decelerating earnings make valuations hard to justify, a key reason this segment may remain unhealthy.
Also read: India’s IPO frenzy hits century to shatter 18-year record, but easy money days are over
For investors navigating this split-screen market, record highs on one end and deep drawdowns on the other, analysts’ advice remains to stay selective and stay with quality.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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