The Indian stock market witnessed a significant shift in leadership in 2025, with a majority of the previous year's high-flyers stumbling. As per a detailed analysis, nearly six out of every ten stocks delivered weaker returns in 2025 compared to their performance in 2024. This pattern of mean reversion, however, is not a foregone conclusion. The critical question for investors now is: what will it take for the outperformers of 2025 to continue their winning streak into 2026, or will they succumb to the trend reversal?
The Large-Cap Conundrum: Sustaining Momentum Proves Tough
The churn was particularly evident in the blue-chip segment. Nearly 60% of large-cap stocks provided weaker returns in 2025 than in 2024. A deeper dive reveals a stark picture: approximately 33% of the large-caps that gained in 2024 slipped into negative territory in 2025. In contrast, only 20% of 2024's decliners managed to bounce back into the green.
Consistency was a rare commodity. A mere 15.8% of large-cap stocks managed to post gains in both 2024 and 2025. Extending the timeline further underscores the challenge; only 14% delivered positive returns for three consecutive years from 2023 through 2025. This rotation impacted key sectors including IT services, pharmaceuticals, industrials, real estate, and consumption, as highlighted in a report by ICICI Securities.
Market experts clarify that this shift is more about valuation pressures than crumbling business fundamentals. "Strong returns often pull forward future earnings expectations, leaving little margin for error," explained Harshal Dasani, Business Head at INVasset. He emphasized that stocks trading at a premium to their historical averages must justify it through tangible earnings growth, not temporary factors already priced in.
Heightened Volatility in Mid and Small-Cap Spaces
The rotation was even more pronounced further down the market capitalization ladder. In the mid-cap segment, over 70% of stocks recorded lower returns in 2025 than in 2024. Alarmingly, about 61% of mid-cap gainers from 2024 turned into losers the following year. Despite this, some resilience was visible, with nearly 18% of 2024's underperformers staging a comeback in 2025.
Small-caps experienced the sharpest swings. Around 63% of stocks that gained in 2024 underperformed (entered losses) in 2025. Only 18.8% of small-caps outperformed in both years, and a scant 17.6% managed to sustain gains across the three-year period from 2023 to 2025. The ICICI Securities report noted that the common thread among 2025's underperformers in the broader SMID (small- and mid-cap) space was a cocktail of high valuations, external sector exposure, and growth concerns.
The Path Forward: Fundamentals Over Momentum for 2026
Looking ahead, the market's gains in 2025 were concentrated. Double-digit returns exceeding 10% came from just 38% of large-caps, 35% of mid-caps, and only 19% of small-caps. The burning question is whether this narrow leadership will persist.
The ICICI Securities report suggests that while 2025's outperformers are not doomed to fail in 2026, a majority of 2026's laggards could indeed emerge from last year's winners. The ultimate decider will be fundamental strength. "For stocks that performed well in 2025 to continue doing well in 2026, earnings viability, earnings upgrades and valuation in relation to expectations will all be important," stated Kuunal Shah, Fund Manager at Carnelian Asset Management & Advisor.
He cautioned that stocks where more than one year of earnings growth is already discounted in the price require careful scrutiny as we enter 2026. Dasani advises investors to shift focus from headline multiples to valuation relative to sustainable growth. As markets navigate 2026, the balance between risk and reward will hinge on earnings visibility, quality of growth, and the price paid for that growth, regardless of a company's market cap size.
