Big Review Report: Sector Preference and Valuation Trends Shape FY27 Market View

Valuation trends across large caps, midcaps and small caps indicate a phase of moderation following elevated levels seen in recent years.

One-year forward price-to-earnings multiples show that:

• Nifty Index valuations have broadly remained in the 18–22x range, with a recent softening towards the lower end
• Midcap valuations peaked near 35x before easing to around the mid-20s range
• Smallcap valuations also saw an expansion towards 25–26x, followed by moderation closer to 20x levels

This indicates a broader cooling in valuations across segments, aligning with the ongoing correction phase, according to HDFC Securties Big Report which was released on Wednesday.

Earnings Growth Outlook Remains Stronger for Broader Markets

Despite recent price corrections, earnings expectations continue to remain constructive, particularly for midcaps and small caps.

Large Caps (Sensex)

• 10-year price CAGR: 10.45 per cent
• 10-year earnings CAGR: 11.60 per cent
• 1-year price decline: -15.6 per cent
• 1-year earnings growth: 3.09 per cent
• Forward earnings growth estimate: 14 per cent

Midcaps

• 10-year price CAGR: 12.9 per cent
• 10-year earnings CAGR: 14.0 per cent
• 1-year price decline: -13.7 per cent
• 1-year earnings growth: 20.8 per cent
• Forward earnings growth estimate: 20 per cent

Small Caps

• 10-year price CAGR: 13.6 per cent
• 10-year earnings CAGR: 15.4 per cent
• 1-year price decline: -16.1 per cent
• 1-year earnings growth: 4.1 per cent
• Forward earnings growth estimate: 29 per cent

This divergence highlights that while price corrections have been broad-based, earnings growth remains relatively stronger in the broader market segments.

Midcaps and Smallcaps Continue to Offer Growth Visibility

The data suggests that midcaps and small caps are positioned to deliver higher earnings growth relative to large caps.

With forward estimates of 20 per cent for midcaps and 29 per cent for small caps, compared to 14 per cent for large caps, the broader market continues to offer relatively stronger growth visibility, the report said.

However, this comes alongside higher volatility and sensitivity to valuation shifts.

Improving Balance Sheets Support Small Cap Fundamentals

Underlying fundamentals within the broader market have also shown improvement over time.

Debt Metrics

The debt-to-equity ratio for companies in the 500–1000 market capitalisation segment has declined steadily from around 0.7x levels earlier to nearly 0.23x in March 2026.

This reduction reflects stronger balance sheets and improved financial discipline.

Profitability Trends

Return on net worth (RoNW) has remained relatively stable:

• Declining towards ~9.7 per cent in March 2021
• Recovering to around 13.8 per cent in March 2022
• Moderating to approximately 12.5 per cent by March 2026

This trend indicates resilience in profitability despite cyclical fluctuations.

Sector Preference Reflects Selective Positioning

The combination of moderating valuations and stable earnings outlook is shaping sector preferences.

While broader market segments offer stronger growth potential, the environment remains selective, with emphasis on:

• Earnings visibility
• Balance sheet strength
• Sector-specific demand trends

The evolving valuation landscape suggests a transition from momentum-driven expansion towards a more earnings-led and fundamentally anchored phase.

Market Positioning Moves Towards Earnings-Led Phase

With valuations cooling across segments and earnings growth expectations remaining intact, markets appear to be entering a more balanced phase.

The focus is gradually shifting from multiple expansion to earnings delivery, particularly in midcap and smallcap segments where growth visibility remains relatively stronger.

This alignment between valuation correction and earnings expectations is likely to play a defining role in shaping market direction through FY27.

HDFC Securities Ltd MD & CEO, Dhiraj Relli alongwith Chief Research Officer – Equities, Varun Lohchab, Head of Institutional Equities, Unmesh Sharma and Head of Prime Research, Devarsh Vakil shared the report and its findings with the media.