Explained: Why midcap and small-cap indices are outperforming NIFTY50 in 2026

The Indian markets have broadly witnessed a mixed performance in 2026 so far, keeping investors in a dilemma. Persistent geopolitical instability, FII selling and inflation risks have kept the benchmark performance largely in check. Despite these risks, the broader indices have diverged from their large-cap peers, posting a divergence in performance.

The NIFTY Midcap 100 index was the first among broader indices to hit fresh record highs at the 64,450 level. The NIFTY Smallcap 100 too caught up in the race and made fresh record highs, crossing the December 2024 highs in August 2026 and extending the bull run further in September.

Meanwhile, the NIFTY50 made a fresh record high in January 2026, rising merely 100 points from the previous record high of 26,277 touched in September 2024. The high underperformance in the largecaps vs midcaps & smallcaps warrants close attention. Let us dig deep to understand the key reasons behind the vast divergence.

NIFTY indices performance in 2026

(Source: NSE, YTD performance as of September 10, 2026)

Divergence in institutional participation

Foreign investors have largely remained net sellers in Indian equities in 2026 on a net basis. The total ownership of FIIs (Foreign Institutional Investors) has touched 17-year low levels, as per NSE data. The fierce selling of Indian equities was largely driven by a mass exodus from the large-cap category, which resulted in large-cap and index-heavyweight stocks being constantly under pressure.

On the contrary, NSE’s Market Pulse report highlights that FII ownership has slightly inched up in Indian equities, excluding the NIFTY50 companies. The negative bias continued in Q1 FY27. According to the latest shareholding pattern data as of Q1FY27, 37 out of the 50 index stocks witnessed FII selling, while only 13 stocks witnessed FII buying, with only four stocks with more than 1% stake addition.

(Source: Screener.in)

NIFTY Midcap 100

On the contrary, the NIFTY Midcap 100 index saw FIIs add stakes in over 41 stocks in Q1FY27 and ~60 stocks where FIIs pared their stakes in the range of -0.1% to -6.35%.

(Source: Screener.in)

NIFTY Smallcap 100

A similar trend was also visible in the small-cap category, where FIIs nearly added stakes in ~40 stocks and pared stakes in the remaining 60 stocks from the 100 index constituents.

Alongside the FII buying, domestic institutional investors, who are growing their stake in the total Indian equity market, added stakes in more than 60 stocks from the NIFTY Smallcap 100 index and NIFTY Midcap 100 index.

Meanwhile, the DIIs also pared stakes in nearly 17 stocks and added over 33 stocks from the benchmark NIFTY50 index. Earnings: Key driver

The incremental participation by the FIIs in the midcap and smallcap category was largely driven by robust earnings growth. According to HDFC AMC’s report on Q1FY27, the profitability for the large-cap category (ex-oil & gas) stood at 20% YoY and 18% YoY at the aggregate level. The midcap and small-cap category witnessed 26% and 34% YoY growth. The strong recovery in earnings of the small-cap category from lower double-digit growth in the previous quarter to strong double-digit growth at 34% validates the conviction of FIIs and DIIs in the small-cap category.

In the large-cap space too, the earnings growth remained resilient at ~20% amid the backdrop of higher energy prices. However, it failed to boost investor sentiment for large-cap stocks. Meanwhile, the mid-cap category continues to post consistent growth of over 20% in profitability for the past few quarters.

JP Morgan, in their quarterly earnings preview, said that, excluding energy stocks, the profit after tax for NIFTY midcap 100 and small-cap grew 42% and 39% YoY, respectively. The report further highlighted that in the MSCI India index, 58% of the companies beat the analyst expectations vs 24% that missed the targets.

To put it in simple terms, NIFTY 50 earnings have improved significantly, but mid-cap and small-cap earnings grew much faster and better than the NIFTY50.

Valuations

At the current price, valuations look much cheaper and more affordable for the NIFTY50 index at a 19x price-to-earnings ratio. However, coupled with earnings growth, the NIFTY Smallcap 100 index provides a more promising picture. The PEG ratio (price-to-earnings growth) factors earnings growth into valuations and is derived as follows.

(PEG ratio = PE/earnings growth)

After the Q1 FY27 earnings, the NIFTY50’s PEG ratio stands at 1.0x, followed by NIFTY midcap 100 at 1.15x, while NIFTY small-cap 100 stands at 0.9x. A ratio below 1 is considered to be undervalued and above 1 is overvalued, while exactly 1 is considered to be fairly valued. Despite rallying 31% from April lows, the NIFTY small-cap 100 trades at a much lower valuation than its mid-cap and small-cap peers. While NIFTY Midcap 100 was the first among the three indices to hit fresh record highs, meaning the growth in earnings was already factored much before it was actually visible.

In summary

Robust and better-than-expected earnings growth was a surprising element for the broader markets, which created many re-rating opportunities across niche sectors. The NIFTY50 continues to see strong selling pressure in the index heavyweight stocks, which has anchored the recovery in the benchmark indices, despite strong earnings growth. Whether the divergence gap will widen or narrow needs to be closely watched and monitored.