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India’s equity market is entering a new phase—one where discerning stock selection may matter more than riding index trends. According to the latest quarterly commentary from the IKIGAI, an alternate investment management firm floated by Pankaj Tibrewal, a famed mid-cap fund manager, the market is increasingly being driven by a narrower group of outperformers, even as the broader base of stocks struggles to keep up.

Data from the Nifty 500 shows a growing gap between index-level returns and the median performance of constituent stocks. In the March quarter (Q4 FY25), the Nifty 500 index declined 6.8%, while the median return of its components was a much deeper –12.8%—a spread of over 600 basis points, the widest of the past year. This marks the continuation of a trend that began in Q2 FY25 and has only intensified each quarter.

Earnings Concentration Driving the Wedge

This divergence is not just a technical quirk—it reflects a deeper shift in the earnings landscape. Corporate profit growth is increasingly concentrated in fewer names. In the Nifty 50, only 16% of companies reported over 25% profit growth in Q3 FY25, a sharp decline from the five-year average of 37%. In the broader Nifty 500 universe, the share of high-growth companies dropped to 33% from a historical average of 40%.

“Nearly all the incremental profit growth in the Nifty 50 came from just three to five companies in the quarter,” the fund said. “The rest showed little to no contribution.”

This phenomenon of profit polarisation, implies that headline indices can mask considerable weakness under the surface. Investors focusing solely on index levels may miss the fact that the bulk of stocks are underperforming, and a handful of heavyweights are skewing the averages.

Why the Shift?

Several structural and cyclical factors are driving this narrowing market breadth:

End of Easy Money: The post-COVID rally was fuelled by abundant liquidity and stimulus measures globally. As central banks have turned hawkish and liquidity tightens, broad-based rallies have given way to a more selective environment.

Valuation Compression: Following a sharp correction in early 2025—where mid-cap and small-cap indices fell 20–25%—investors are now more focused on earnings resilience and valuation support. High-multiple, lower-quality stocks have been de-rated sharply.

Earnings Visibility: Investors are gravitating towards companies with consistent earnings visibility amid global uncertainties like trade wars, inflationary pressures, and supply chain reshuffling.

Sector Skews: Within the large-cap indices, sectors like oil & gas, public sector banks, and utilities (which trade at lower P/E multiples) now form a significant part of the profit pool. These sectors contribute to the index's valuation comfort, but may not reflect broader earnings momentum.

Stock Picking is Back

Against this backdrop, fund managers are pivoting to more bottom-up, stock-specific strategies. “This is a time to be selective,” the IKIGAI fund manager wrote. “Not everything is working well, and averages are skewed by a few leaders.”

Valuations, too, are less forgiving than they appear on the surface. Adjusting for low P/E contributors like PSU banks and oil & gas firms, the Nifty 50 trades at 26x forward earnings—higher than the Nifty Midcap 150 at 23x. So the perception that large caps are universally cheap may be misleading.

At the same time, many mid- and small-cap companies are showing improved balance sheets, with debt levels at multi-year lows, and are expected to deliver faster earnings growth than their large-cap peers over FY24–27. That adds further weight to the idea that investors must now dig deeper—beyond index labels and size classifications—to find durable winners.

The Index is No Longer the StoryIn previous cycles, broad beta exposure may have sufficed. But as earnings concentrate, volatility returns, and macro risks rise, the playbook is shifting. The market is no longer lifting all boats. Instead, investors must ask: are they holding the boats that can sail through the storm?

Or as IKIGAI put it: “This is not a time to react. It’s a time to recalibrate.”

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