Largecap stocks may outperform as midcap rally loses steam, says JM Financial

Largecap stocks could be poised to outperform after years of underperformance as technical indicators point to weakening momentum in mid- and small-cap stocks, according to Rahul Sharma, Director & Head of Technical and Derivatives at JM Financial Services.

Sharma said the firm's analysis indicates that market leadership could shift over the coming months if the Nifty manages to defend the 22,000 level. He expects improving breadth in largecap stocks, stable valuations and supportive earnings to drive the next phase of the market.

However, he cautioned that a break below the key support level could trigger a deeper correction.

"The leadership which hitherto has been very powerful and persistent is finally becoming overcrowded," Sharma said. "Sooner than later we will see a lot of capital being rotated... from these small and midcaps to largecaps."

According to Sharma, technical indicators are already showing early signs of a change in market leadership. While participation in midcap and smallcap stocks has weakened, largecap stocks are beginning to stabilise.

"The charts are definitely giving a whisper as of now. They're not crying it out loud, but the whisper is strong enough to be not ignored," he said.

JM Financial's report notes that the relationship between largecap and midcap or smallcap performance is at multi-year lows, while market breadth has improved for Nifty constituents relative to the broader market.

Sharma said the Nifty's 22,000 level remains the key technical support for investors. If the index sustains above that mark over the next two to three months, he believes largecap stocks could lead the benchmark towards 24,000. If the support fails, however, the index could decline towards 20,500.

"We are not calling that midcaps and smallcaps will go for a meltdown, but this is not the time to be bullish on midcaps and smallcaps," Sharma said.

Among sectors, Sharma sees opportunities in banking, financials, automobiles, defence and selected heavyweight stocks such as Reliance Industries and HDFC Bank, where selling pressure has eased and valuations have become more attractive.

He also said macro factors, particularly crude oil prices and US bond yields, remain critical for market direction. While geopolitical developments continue to influence oil prices, Sharma believes improving domestic earnings could support sentiment.

"I would put my money on case A happening," he said, referring to his base-case scenario of the Nifty holding 22,000 and largecap stocks leading the next leg of the rally.

Sharma said India's IT companies could remain relatively resilient despite volatility in global AI-related stocks. "AI is too big a bubble to fail," he said, adding that any global correction may have a relatively smaller impact on Indian equities compared to other markets.

For the full interview, watch the accompanying video



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