NIFTY50 soars over 500 points, while midcap and smallcap indices lag; whats driving the underperformance?

Indian benchmark indices are witnessing one of the best trading sessions in over seven months as the NIFTY50 and SENSEX surged over 2% on Thursday after crude oil prices fell to one-month lows on Thursday. The overnight 10% plunge in crude oil prices abated fears of inflation and elevated interest rates in the economy. The rally looks broad-based, with 39 out of the 50 stocks in the index trading in the green, while 11 traded in the red. Similarly, in the Sensex, 23 stocks are trading in the green, and 7 others are in the red.

At the sectoral level, all the sectors are trading in the green, except for NIFTY Media and NIFTY Chemicals. NIFTY Financial Services (ex-bank) (+4.5%), NIFTY Auto (+4.1%), NIFTY Realty (+3.4%), NIFTY Private Bank (+3.4%), NIFTY Cement (+3.3%), and others were on the winning side on Thursday afternoon.

A large part of this rally was driven by the index heavyweight stocks. ICICI Bank (+4.5%), HDFC Bank (+2.4%), Bajaj Finance (+7.4%), M&M (+5.7%), and Axis Bank (+3.1%) together lifted over 260 points in the index. While Shriram Finance (+7.1%), Tata Motors Passenger Vehicles (+6.6%), and BSE (+5.8%) were among the top five gainers, including M&M and Bajaj Finance.

Midcaps and smallcaps lag

As the benchmark indices marched ahead for the fifth consecutive session, the broader indices failed to keep up with the benchmark peers. NIFTY50 and SENSEX surged more than 2.4% on Thursday, while the NIFTY Midcap 100 surged 1.9% and the NIFTY Smallcap 100 rose almost 1%.

The NIFTY Midcap 100 index opened at 24,378 against the previous day's close of 23,960 and made an intraday high of 24,579. Out of the 100 stocks in the index, 73 traded in the green and 27 others traded in red. Ashok Leyland (+17.1%), Groww (+8.3%), Motilal Oswal Financial Services (+7.6%), LG Electronics (+7%), and MRF (+6.7%) were the top five gainers.

The NIFTY Smallcap 100 was among the major underperformers in the broader indices, with a 0.9% gain on Thursday afternoon. However, index breadth remained strong, with 75 stocks traded in the green and 25 others traded in the red. Devyani International (+8.1%), Samman Capital (+5.9%), Wockhardt Pharma (+5.7%), Karur Vysya Bank (+5.3%), and Apollo Tyres (+4.8%) were the top five gainers.

Why are broader indices lagging in today’s rally?

Broader indices have relatively outperformed the benchmark indices this year. While NIFTY50 still trades in the red on a YTD basis, NIFTY Smallcap 100 is up 8% in the same period, and the Midcap 100 index remained largely flat. In addition, the index has heavyweights that previously lagged in earnings growth and posted strong earnings growth in Q2 of FY27.

NIFTY50’s price-to-earnings ratio touched 19x, the lowest in four years, compared to its five-year median of 21.9x. Whereas NIFTY Smallcap 100 traded at 34x, a significant premium to its five-year median of 29.1x. Similarly, the NIFTY Midcap 100 traded at 29x PE, slightly higher than the five-year median of 26x.

The relative underperformance of the NIFTY50 and the discount to long-term valuations made it attractive and affordable at the lower levels, driving the outperformance in the past few sessions.