Large-Cap Equities Back in Favor as Crude Oil Prices Rise and Bond Yields Increase Keep Investors On Their Toes

The rise in large cap equities has started once again as investors move ahead in the market which is being driven by high crude oil prices, increasing bond yields and tightening monetary policy. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

After underperforming relative to small cap equities for most part of 2026, there are some big cap Indian stocks that appear relatively favorably valued. There are strong indications that analysts believe it can no longer be ignored especially during this period when higher borrowing costs make investors more discerning about where they invest. 

The change is occurring after a tough period for the Nifty 50 index. The index has declined close to 13% so far in 2026 while Nifty Smallcap 250 index has risen close to 7% and Nifty Microcap 250 index has gone up close to 16%. 

Oil and Bond Yields Keep Investors Cautious 

The global backdrop remains challenging. 

The US 10-year Treasury yield has climbed to 5.32%, up from 4.15% at the end of 2025. That is an increase of 117 basis points this year. 

Crude oil is adding another layer of uncertainty. Brent is testing the $100-a-barrel mark amid the conflict in West Asia, although prices have eased from around $125 earlier this year. 

Higher oil and persistent inflation concerns have already prompted major central banks to tighten policy. 

The US Federal Reserve has raised interest rates by 25 basis points to 3.75-4%, its first increase in three years. The Bank of Japan has raised rates twice to 1.25%, while the European Central Bank has lifted rates by 25 basis points to 2.25%. 

India has felt the impact as well. The country’s bond yields have risen by nearly 50 basis points over the past two months, with the benchmark yield reaching 7.21%. 

Large Caps Begin to Look More Reasonably Priced 

Against this backdrop, valuations are increasingly working in favour of large companies. 

Jefferies India said the risk-reward balance for large caps has become more favourable compared with midcaps, while the difference in earnings growth between the two segments is also expected to narrow over FY26-FY28. 

The broader correction has already brought valuations down considerably. 

MSCI India’s one-year forward price-to-earnings multiple has fallen to 18.4 times since the market began declining in August. That is around 7% below its 10-year average. 

India is not inexpensive on every measure, though. MSCI India still trades at a 90% premium to emerging-market peers, considerably higher than its 10-year average premium of 64%. 

At the individual-stock level, Jefferies said companies representing 39% of MSCI India’s weight are now trading at least 10% below their historical valuations. 

Valuation Correction Has Been Sharpest in Large and Mid Caps 

The contrast becomes clearer when current valuations are compared with the peaks reached in 2024. 

According to Motilal Oswal Financial Services, large-cap valuations have corrected 29% from those highs, with their 12-month forward price-to-earnings multiple falling from 24.8 times to 17.6 times. 

Mid-cap valuations have dropped 27%, from 35.6 times to 25.8 times. 

Small caps have seen a much smaller reset. Their valuations have fallen just 4% from the 2024 peak and currently stand at 23.6 times forward earnings. 

The Nifty 50 is now trading 16% below its long-period valuation average, according to Motilal Oswal. Midcaps remain 4% above their long-term average, while small caps are still 27% higher. 

That is a very different picture from September 2024, when large-, mid- and small-cap valuations were all well above their historical averages. 

Could Foreign Investors Return to Large Caps? 

G Chokkalingam, founder and head of research at Equinomics Research, believes selective smaller companies with strong earnings can continue to perform. 

But he sees a stronger relative case for large caps, particularly if crude oil prices and bond yields begin to ease. 

In such a situation, he expects foreign institutional investors to return more strongly to Indian equities, with large caps likely to receive a significant share of those flows. 

That possibility remains dependent on several moving parts, including the conflict in West Asia, the direction of crude oil, bond yields and the path of interest rates. 

For now, the argument for large caps is becoming less about chasing momentum and more about the price investors are being asked to pay. 

Smaller companies have delivered stronger returns this year, but many continue to trade above their historical valuation levels. Large caps, meanwhile, have absorbed a much deeper correction. 

With oil, interest rates and bond yields keeping the broader market unsettled, that valuation reset is putting India’s biggest companies back on investors’ radar.