Of the 100 large caps, 96 reached all-time highs in the past five years and 42 of these 96 are trading at least 20% below their peaks.
Last week, large-cap Trent delivered healthy revenue growth (year-on-year) of 17 percent in Q3 FY26. Still, the stock fell about 10 percent after the results. The stock is down more than 52 percent from its October 2024 peak. Trent is not alone, and similar stories are playing out at other large caps as well.
Of the 100 large caps, 96 reached all-time highs in the past five years and 42 of these 96 are trading at least 20 percent below their peaks. So before you tune in to the usual safety mantras for large caps, investors need to understand why many stocks in that segment have also fallen.
Valuation problem
Despite falling more than 20 percent from all-time highs, several large caps such as Eternal (P/E of 1460x), Avenue Supermarts (91x), Solar Industries (90x), CG Power (88x), Trent (87x), Siemens Energy (78x), Adani Green (77x) and Max Healthcare (73x) are still trading at high earnings multiples. High valuations were easier to justify earlier when earnings growth was visible and ultra-low global bond yields made Indian equities attractive to financial institutions.
That tailwind is now diminishing. Large-cap valuations are increasingly challenged by one or more of three factors: share prices that easily exceed earnings growth, slowing profitability and declining growth.
For example, the market capitalizations of stocks like HAL and Solar Industries have significantly outperformed earnings growth. Since the end of 2019, HAL’s market capitalization has grown 12.2x, while earnings have grown just 2.9x (on a trailing twelve month basis). Solar Industries’ market cap is up nearly 12x, versus a 4.5x earnings increase.
In general, there has been a broad-based valuation expansion. As of December 2019, then-large caps had an average price-to-earnings ratio of 27x (see chart). More than half of them had a price-to-earnings ratio of less than 30x. Now, however, the average price/earnings has risen to 34x and only 39 percent of stocks have a price/earnings of less than 30x.
It becomes even clearer when you look at the large-cap universe, with the exception of the financial sector. Today’s large caps, excluding financials, have an average price-to-earnings ratio of 37x, with only one in three stocks having a price-to-earnings ratio of less than 30x.
Estimates wrong
Bee bl.portfoliowe conducted an analysis (data from Bloomberg) to determine whether large caps posted gains in line with consensus estimates, which were at all-time highs. The results (see graph) show significant errors across names.
For stocks that peaked in FY26, estimate cuts were sharp. Consensus estimates for FY26 are down 27 percent for Eternal, 38 percent for Indigo, 22 percent for Mazagon Dock and 15 percent for Adani Power from peak levels. Trent’s FY26 earnings expectations are now almost half of what they once reached.
This is further compounded by the issue of slowing growth in some stocks such as Trent and Avenue Supermarts. For example, Trent’s revenue grew 18 percent less in the first nine months of FY26, compared to 42 percent in the first nine months of FY25. This disconnect between valuation and growth was a key trigger for last week’s stock correction.
In a global financial regime with sufficient liquidity, some of these factors could be omitted. But as discussed earlier in this column (bl.portfolio edition dated December 21, 2025 ‘What needs to change for FIIs to return’), the global liquidity cycle has been changing for the past 15-17 years. If this happens, large-cap valuations will become more anchored by fundamentals and less by other factors.
What is the right valuation for large-cap stocks? The year 2026 might provide a clear answer to that.
Published on January 10, 2026
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