In its latest ‘Thinking Aloud’ note titled ‘It’s time to look at large caps as well,’ Axis Mutual Fund has flagged a potential shift in market leadership. The fund house argues that large caps are due a fresh look after a prolonged stretch in which mid and small cap (SMID) stocks cornered most of the gains.
The post-pandemic rally was led by domestic growth themes such as infrastructure, industrials, manufacturing, defence, capital goods, healthcare, capital markets and consumption, sectors that are more heavily represented in the small and mid-cap (SMID) universe.
The fund house further noted that faster growth, easier access to capital and repeated earnings disappointments from large caps only widened the gap in favor of smaller companies.
Why large caps deserve another look
As per Axis Mutual Fund, there are six factors that are reshaping the views of the fund house around the large caps. These include;
GDP-linked earnings recovery – The fund house said that the Nifty 50 revenue growth is projected to touch nearly 19% by June 2026, which is a three-year high. It further cautioned that the margin pressures from wage inflation and commodity costs may keep PAT growth more muted.
Credit and consumption holding up – Amid the prevailing uncertainty, credit growth has roughly doubled year-on-year to 18.6%, while two-wheeler sales, a proxy for mass-market and rural demand, have stayed resilient despite global uncertainty.
Valuation gap has widened – Axis MF claimed that the valuations of private bank, IT services and Nifty 50 are trading near or below historical averages, even slightly below Dec-19 levels in some cases. Mid-caps, by contrast, are about 57% above their 2019 valuations and small caps over 70% higher.
Currency and supply-chain tailwinds – The rupee has weakened 18-22% against major currencies since January 2025. The fund house said that this can be a potential boost for IT, pharma, specialty chemicals and export-facing manufacturers.
Commodities off their peak – It further pointed out that crude and broader commodity indices have cooled from earlier highs and this could ease inflation and margin pressure if the moderation holds.
Risk-adjusted return case – The fund house has claimed that historical three-year rolling return data shows leadership rotates. Large caps led post-GFC, SMIDs dominated 2014-17 and again through the 2023 peak. But, said the fund house, sustained outperformance by any one segment has always eventually moderated.
Potential risks
While talking about the potential challenges, Axis MF points out three key risks: a renewed commodity/crude oil shock (Brent has already bounced back to around USD 100/barrel from below USD 72 earlier in the cycle), a possible unwind in the crowded global AI trade that could trigger broader risk-off sentiment, and elevated global debt levels (Japan at 249% of GDP, Singapore at 171%) that could cap room for monetary and fiscal easing.
Time for a balanced approach
Stressing on asset allocation framework, Axis Mutual Fund said that the above data does not suggest to rotate entirely out of SMIDs. Rather, it frames the next phase of Indian equities as a broadening of opportunity rather than a large cap-versus-SMID debate, which should result in a more balanced portfolio approach as market leadership potentially widens.
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