Large-caps regain favour as oil, bond yields fuel rate-hike worries

Analysts are turning increasingly positive on large-cap stocks as firm oil prices, elevated bond yields and a more hawkish stance by global central banks raise concerns over the outlook for equities. The US 10-year Treasury yield has climbed to 5.32 per cent from 4.15 per cent at the end of 2025, a rise of 117 basis points (bps) so far in 2026.
Brent crude oil prices, meanwhile, are testing the $100-a-barrel mark amid the ongoing geopolitical conflict in West Asia, although they have cooled from the $125-a-barrel level seen earlier this year. The developments have pushed global central banks towards tighter monetary policy.

The US Federal Reserve (US Fed) has raised rates by 25 basis points (bps) to 3.75-4 per cent, its first hike in three years. The Bank of Japan has raised rates twice to 1.25 per cent, while the European Central Bank has increased rates by 25 bps to 2.25 per cent.
“We believe risk-reward is becoming more favorable for large-caps on better relative valuations versus midcaps, while the earnings growth gap is narrowing over FY26-28E,” wrote Mahesh Nandurkar, managing director and head of equity research at Jefferies India, in an October 6 note co-authored with Abhinav Sinha, Priyank Shah and Aditi Singla.

G Chokkalingam, founder and head of research at Equinomics Research, expects selective small- and mid-cap stocks with strong earnings to perform well. However, he believes large-caps could outperform their smaller peers, particularly if oil prices and bond yields start to cool.
“In such a scenario, we expect FIIs to return to Indian equities, especially large-caps, in a big way and this segment will outrun the smaller peers. That said, the developments may take time to play out, depending upon how the West Asia conflict shapes up and impacts oil prices, bond yields and the interest rate trajectory,” he said.

Since August 2026, the market decline has brought MSCI India’s one-year forward PE to 18.4x, about 7 per cent below its 10-year average. However, its valuation premium over emerging-market peers remains elevated at 90 per cent, compared with a 10-year average of 64 per cent.
At the stock level, companies accounting for 39 per cent of MSCI India’s weight now trade at valuations at least 10 per cent below their historical averages, the Jefferies note said. The valuation gap is also visible across market-cap segments. The Nifty 50 has slipped nearly 13 per cent so far in CY26, while the Nifty Smallcap 250 and Nifty Microcap 250 have gained around 7 per cent and 16 per cent, respectively, according to ACE Equity data.

Ongoing market consolidation, alongside continued earnings recovery from FY25 lows, has resulted in a sustained cooldown in valuations from the peaks seen in 2024, according to analysts at Motilal Oswal Financial Services (MOFSL). Large-cap valuations have declined from 24.8x to 17.6x, while mid-cap valuations have fallen from 35.6x to 25.8x.
Small-caps, in contrast, have corrected just 4 per cent from their 2024 peak and trade at 23.6x forward PE, MOFSL said. CLICK HERE FOR THE GRAPHIC “The Nifty-50 is now trading 16 per cent below its long-period average (LPA), while mid- and small-caps are trading 4 per cent and 27 per cent above their respective LPA,” the analysts said.

This compares with September 2024, when the Nifty 50, mid-cap and small-cap segments were trading 20 per cent, 50 per cent and 47 per cent above their respective long-period averages.