Large-Cap stocks likely to outperform broader markets in 2026: SBI Mutual Fund

As Indian equity markets move further into a phase of normalization, SBI Funds Management expects large-cap stocks to maintain leadership over mid- and small-cap segments in 2026, citing valuation comfort, stronger earnings visibility, and balance-sheet resilience.

In its Market Outlook 2026, SBI MF noted that after years of stretched valuations and euphoric investor sentiment, markets witnessed a sharp correction in early 2025 that marked a turning point in investor behaviour. The correction helped realign prices closer to fundamentals, particularly in the broader market, where speculative excesses were unwound more sharply.

Large Caps Lead Amid Weak Market Breadth

According to the report, the divergence in performance between market segments was evident through 2025. While benchmark indices such as the Sensex and Nifty gained 10.5% and 12% respectively, the Nifty Midcap 150 rose just 6.2%, and the Nifty Smallcap 250 declined 5.3%.

“In relative valuation terms, broader markets remain expensive versus large caps. Entering 2026, this picture has not changed materially, and we expect leadership to stay with large caps, leading to further polarization,” the report said.

SBI MF added that although selective opportunities may still exist in mid- and small-cap stocks, investors should avoid broad-based exposure and focus instead on quality and stock-specific fundamentals.

2025 Marked a Reset in Valuations and Sentiment

The report described 2025 as a year of normalization, with markets entering the year on elevated valuations and high optimism. The sharp correction in January and February helped cool investor sentiment, bringing it back to neutral levels from earlier euphoric readings.

Mid- and small-cap stocks bore the brunt of the correction, reflecting the unwinding of speculative positions built up over previous years. In contrast, large-cap stocks proved relatively resilient, benefiting from scale, liquidity, and stronger balance sheets.

Asset Allocation Turns Neutral as Valuations Reset

SBI MF highlighted that equity valuations, measured against government bond yields, moved closer to long-term historical averages as stock prices corrected and bond yields softened. This prompted a reassessment of asset allocation.

Under its internal framework, the fund house moved to a neutral stance on equities, with recommended equity allocation increasing to around 60%, compared with just 20% at the start of 2025. The shift reflects improved valuation comfort, even as earnings growth remains uneven.

Headline Gains Mask Structural Weakness

Despite double-digit gains in frontline indices, the report cautioned that market breadth remained weak through 2025. Gains were concentrated in a narrow set of large-cap stocks, while broader participation remained limited.

SBI MF views this narrowing of leadership as a structural trend rather than a temporary distortion, and expects it to persist into 2026.

Policy Support Stabilises, Earnings Recovery Slow

Government reforms—including income tax relief, GST rationalisation, labour reforms—and aggressive monetary easing by the Reserve Bank of India helped stabilise financial conditions in 2025. However, the report noted that policy support alone may not lead to an immediate or broad-based earnings recovery.

While corporate earnings growth remains subdued, the pace of downgrades has slowed, with upgrades and downgrades now largely balancing out—suggesting earnings expectations may be nearing a trough.

Domestic Flows Offset FPI Selling

Foreign portfolio investors were net sellers for much of 2025, but strong domestic institutional inflows helped absorb market volatility. SBI MF said this points to a structural shift in Indian markets, with domestic investors playing a growing role in providing stability.

India’s underperformance relative to emerging market peers during 2025 also led to a moderation in its valuation premium, improving its relative attractiveness as global investors reassess risk and valuations.

Overall, SBI MF expects large-cap stocks to remain the preferred segment in 2026, as markets continue to prioritise quality, earnings visibility, and balance-sheet strength over broad-based momentum.