A Review of Index Returns and Valuations with Implications for Investors in 2026
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Benjamin Graham
Here are some reflections on the performance and current valuation of major market indices in 2025 and what it means for 2026. Please note, these are personal observations and not investment advice—consult a professional before making decisions.
Large cap stocks start to outperform small caps and mid-caps
In 2025, mid-cap and small-cap stocks did not perform as strongly as anticipated. Instead, both the NIFTY 50 and NIFTY 50 Equal Weight indexes outshined, whereas small caps—tracked by the NIFTY Smallcap 250—fell behind. This change underscores the recurring cycles within equity markets, especially since small and mid-caps had previously posted higher returns than large caps in earlier years.
but mean-reversion is probably far from over
When comparing the long-term performance of indices like Nifty 50 and Nifty Small Cap 250, their 10-year rolling average returns are quite similar, with no significant outperformance by small caps. However, over shorter periods such as 3 or 5 years, small caps have performed much better. This suggests that large caps may outperform smaller stocks in the near future due to mean reversion, although market outcomes remain unpredictable and past trends do not guarantee future results.
valuations support large cap stocks
The table below summarizes the valuation performance of major broad market indices.
- Current valuations compared to historical averages show large-cap stocks remain attractively valued.
- Small-cap and mid-cap stocks are more expensive based on price-to-earnings ratio, price-to-book value, or dividend yield.
- Despite large-cap stocks outperforming over the last 12 months, their valuation status is largely unchanged.
- This indicates stronger valuation support for large-cap stocks compared to small- and mid-cap stocks.
Key takeaways for 2026
In 2025, we began to see mean reversion in the performance of large-cap stocks compared to mid-cap and small-cap stocks. Currently, large caps still offer better valuations relative to their smaller counterparts, providing both valuation support and room for continued performance normalization. Over the past year, foreign institutional investors have withdrawn significant funds from the Indian market. If these investors return and seek out reasonably valued opportunities, they may favor large-cap stocks, potentially resulting in renewed investment flows. Considering these factors, the Nifty Top 100 seems to be the best choice at present. Ultimately, only time will reveal whether 2026 continues the trends of 2025 or takes a new direction.
From mutual fund investments perspective, I am leaning towards large cap and flexi cap funds. Next week, I will review sectoral performance and that may have some implications for mutual fund investments.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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