Midcaps Emerge Frontrunners as Smallcaps Slip in Q1 Earnings, Largecaps Hold Steady

Standing in the middle of the Q1 earnings season, the interim scorecard suggests a clear winner. It is India Inc’s midcap segment that has taken the lead with earnings growth in the June quarter, while smallcaps witnessed a blip and largecaps held steady.

As of 2 August, a total of 184 companies under Motilal Oswal Financial Services’ coverage have reported their Q1 earnings. Midcaps grew 12% year-on-year, topping estimates of an 8% growth as the segment extended its lead for the third consecutive quarter. Growth was broad-based across technology, capital goods, PSU banks, healthcare, and cement, the brokerage stated in a report.

Apart from that, 38 companies that released their results belonged to the blue-chip Nifty 50 index, with an average year-on-year earnings growth of 7.5%. Though lower than their midcap peers, this was still above expectations of a 5.7% uptick. A few heavyweight names drove all the incremental earnings gains in the Nifty.

Motilal Oswal further revealed that names like Reliance Industries, HDFC Bank, ICICI Bank, JSW Steel, Bajaj Finance, Larsen & Toubro, and Mahindra & Mahindra accounted for 100% of the incremental year-on-year earnings growth for the Nifty.

On the other hand, the smallcap segment lagged far behind, reporting a 9% drop in earnings growth, sharply lower than estimates of a 3% increase. The key sectors that dragged earnings growth in the smallcap space included private banks, non-banking financial companies, automobiles, and oil and gas.

The divergence in earnings performance across different market segments was even more stark when viewed through the lens of their hits-and-misses ratios. While only 20% of midcaps and 29% of largecaps missed expectations, the number surged to 45% within the smallcap space, according to Motilal Oswal.

That said, the brokerage added that the Q1 FY26 earnings thus far have broadly been in line, with the intensity of earnings cuts moderating compared to previous quarters. Despite this, the trend of a higher number of downgrades persists into the quarter.

Meanwhile, taking the Q1 earnings trend into account, Motilal Oswal now projects earnings-per-share growth for the Nifty 50 to hover around 10% in FY26, a sharp jump from the anaemic 1% in FY25. According to the firm, the expected growth is likely to be driven by an improvement in the macroeconomic environment, aided by stimulative fiscal and monetary measures.

The Road Ahead

Despite the not-so-strong earnings growth on an aggregate basis, Motilal Oswal remains hopeful and believes that better earnings prospects and reasonable valuations, barring smallcaps, should help the market to eke out gains.

Also commenting on the anticipated impact of Donald Trump’s proposed tariffs on Indian markets, the firm sees the impact as limited. It holds the view that despite July’s mild softness, the recovery from the April lows, improving earnings prospects, and attractive valuations support a positive stance.

As a result, the brokerage remains more inclined towards largecaps, but has also turned more constructive towards midcaps owing to better earnings delivery and improving prospects.

On the sectoral front, Motilal Oswal holds an overweight stance on banking and financial services, consumer discretionary, industrials, healthcare and telecom, while it remains underweight on oil and gas, cement, real estate, and metals.