Large-Cap Stocks Face Reality Check: Safety Myth Challenged

Large-Cap Stocks Face Reality Check: Safety Myth Challenged

The narrative that large-cap stocks are inherently safer and more attractive than their mid- and small-cap counterparts is facing a rigorous test. Trent, a prominent large-cap, recently posted a solid 17% year-on-year revenue growth for Q3 FY26. However, the market reacted negatively, with the stock shedding approximately 10% post-results and now trading more than 52% below its October 2024 peak.

This is not an isolated incident. Across the Indian large-cap universe, a significant number of stocks are diverging from the expected safety premium. Out of 100 large-cap companies, 96 reached all-time highs within the last five years. Yet, a substantial 42 of these are currently trading at least 20% below their respective peaks, indicating broad-based weakness despite their size.

Valuation Concerns Mount

Despite considerable drops from their all-time highs, several large-cap companies continue to command lofty earnings multiples. Stocks such as Eternal (P/E of 1460x), Avenue Supermarts (91x), Solar Industries (90x), CG Power (88x), and Trent (87x) still trade at P/E ratios that demand significant future earnings growth. This exuberance was more justifiable when global bond yields were ultra-low and earnings visibility was strong, attracting substantial foreign institutional investor (FII) inflows.

These tailwinds are now waning. The valuations of many large-cap companies are being pressured by a combination of stock prices significantly outpacing earnings expansion, delayed profitability, and decelerating growth rates.

Earnings Growth Divergence

The disconnect between market capitalization growth and actual earnings expansion is stark for several prominent names. Hindustan Aeronautics Limited (HAL) has seen its market cap surge 12.2 times since the end of 2019, while its earnings have grown by a more modest 2.9 times on a trailing twelve-month basis. Similarly, Solar Industries India Limited's market cap has climbed nearly 12-fold, contrasted with a 4.5-fold increase in its earnings over the same period.

This trend reflects a broad-based expansion in valuation multiples. As of December 2019, the median P/E for then-large caps stood at 27x, with over half trading below 30x. Today, the median P/E has climbed to 34x, with only 39% of these stocks trading below a 30x multiple. The situation is even more pronounced when excluding financial sector companies, where the median P/E reaches 37x.

Shifting Global Liquidity Landscape

Analysis of consensus estimates also reveals significant underperformance. For stocks that peaked in FY26, earnings estimate cuts have been substantial, with Eternal seeing a 27% reduction, Indigo 38%, Mazagon Dock 22%, and Adani Power 15%. Trent's FY26 earnings estimates are now nearly half of their previous peak levels.

Furthermore, growth is tapering for companies like Trent and Avenue Supermarts. Trent's revenue growth moderated to 18% in the first nine months of FY26, down from 42% in the comparable period of FY25. This valuation-growth mismatch served as a key catalyst for recent stock corrections. The global financial environment, characterized by ample liquidity in prior years, is changing. As global liquidity tightens, large-cap valuations are expected to become more anchored by fundamental performance rather than speculative factors. The year 2026 may well provide clearer answers on what constitutes appropriate valuations for these market giants.