From 807% multibagger gains to a market where every second stock is now in the red, the Nifty 500's three-year party has given way to a very different 2026. As many as 106 Nifty 500 stocks delivered multibagger returns over the past three years, with gains of up to 807%. But in 2026, more than half of the index's stocks have fallen, with losses stretching to as much as 61%, while the Nifty 500 itself is down 5%.

Fast forward to 2026, and the picture has changed sharply. The Iran war, persistent FII selling, rich valuations and fears of higher interest rates have taken a toll on the broader market. The number of multibaggers has now fallen to just six, while the Nifty 500 is down 5% so far this year. More than half of the index's stocks are in the red, with losses extending to as much as 61%, stock exchange data showed.

Over the three-year period, MCX has been the brightest spark, soaring 807%, followed by BSE, which has gained 710%, and Hitachi Energy, up 670%, among others.

The leaderboard for 2026, however, looks very different. Welspun Corp has emerged as the biggest gainer, rising more than 230%, followed by HFCL, which is up over 206%. Raymond, Syrma SGS, Apar Industries and Aegis Logistics have also posted gains of more than 100% in 2026.

The other side of the market has been far less forgiving. As many as 276 scrips are down, with losses extending to 61%. Rajesh Exports, HEG, Alok Industries, KPIT Tech and CE Info Systems are among the biggest decliners.

From top to bottom in a flash

The shift in the broader market has come against the backdrop of persistent foreign selling. Since the September 2024 market peak, FIIs have remained net sellers, with cumulative outflows of nearly $60 billion, including almost $30 billion in 2026.

Foreign investors' brief return to Indian equities also appears to be losing steam. After turning buyers in July and August, FPIs returned to selling in September. They bought Rs 11,045 crore in July and Rs 10,231 crore in August, but NSDL data up to September 19 showed FPI outflows of Rs 23,676 crore through the exchanges.

"There are indications of FPI flows into India again turning negative after the positive flows in July and August," Vijayakumar said.

Analysts have pointed to higher crude prices, elevated US bond yields, geopolitical risks and currency concerns as key reasons behind the renewed foreign selling. Vijayakumar said future FPI flows will be influenced by the ongoing Iran-US conflict and its impact on crude prices.

Higher crude prices are negative for India because they can widen the current account deficit, increase inflation pressure and weaken the rupee.

Iran war and inflation worries

Crude prices flared up after Iran shut the world's most important waterway, the Strait of Hormuz, putting Indian equities at risk amid rising costs and a slowdown in earnings growth.

Fears of an interest rate hike are also keeping investors at bay. The US Fed upped rate hikes for the first time in over three years, with markets anticipating this year.

Valuations more attractive, but India lacks a strong trigger

There is some relief on the valuation front, but that alone may not be enough to bring foreign investors back in a meaningful way.

According to Elara, India's valuation premium over emerging markets has corrected sharply, with the MSCI India-to-MSCI Emerging Markets price-to-earnings multiple falling to 1.30x from 1.73x in June 2025.

However, the brokerage believes attractive valuations alone are unlikely to drive a sustained revival in FII flows.

It expects foreign investors may selectively increase exposure to India as a contrarian trade, but a broader return of capital will require two key developments: a cooling of the ongoing US artificial intelligence-led rally and a meaningful improvement in corporate earnings. Until then, India lacks an immediate thematic trigger that can attract large foreign allocations beyond selective buying opportunities.

Should investors tread carefully?

Elevated valuations have complicated the investment case despite stronger earnings. Midcap and smallcap stocks were the primary drivers of market performance in the first half of 2026, supported by retail and domestic institutional flows, resilient economic growth and improving earnings expectations.

But the sharp appreciation has reduced the margin for error, particularly where valuations already assume sustained high growth.

Midcaps and smallcaps may still offer strong earnings growth, but much of that optimism is already reflected in their prices. Bajaj Life Chief Investment Officer Srinivas Rao Ravuri sees a more compelling risk-reward opportunity in largecaps, with broader-market indexes trading at premiums of as much as 50% to their long-term valuations.

After years of outperformance by the broader market, Ravuri said largecaps now offer better valuation comfort, earnings visibility and room for recovery.

"At this point, we have a clear preference for large-caps. The Nifty 50 is now trading close to its long-term average one-year forward P/E, while midcaps and small-caps are trading at roughly 25 to 50% premiums to their respective long-term averages. We do expect strong earnings growth from the broader market, but we think a lot of that is already reflected in valuations. So, for incremental money today, we find the risk-reward much more attractive in large-caps," Rao added.

Investors almost always chase recent returns. Small and midcaps have sizably outperformed largecaps over the last three years, and those categories have consequently been receiving larger flows. There is a strong merit in not ignoring largecaps given the margin of safety they offer today.

The next phase may not be as easy. Analysts have warned that the market is likely to remain selective, with earnings delivery, balance-sheet strength and valuations becoming more important.

The forward earnings differential also remains in favour of smaller companies. FY27 profit growth is estimated at about 16% for the Nifty 100, 20% for midcaps and 34% for smallcaps, according to Venugopal Manghat, chief investment officer-equity at HSBC Mutual Fund.

"This provides room for mid and smallcaps to catch up with earnings," Manghat said. "However, given that smallcaps continue to trade at a premium, selectivity remains critical, with a focus on balance sheet strength, cash flow visibility and sustainable returns."

Manghat said the valuation gap alone does not justify a decisive move toward largecaps, particularly as key largecap sectors such as information technology and consumer staples may continue to face weak earnings growth.

The market, then, is entering a phase where past returns may offer less of a guide to what comes next. With the broader rally having pushed valuations higher even as earnings growth remains uneven across segments, the gap between performance and fundamentals is becoming harder to ignore.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.