India’s Stock Market is Undergoing a Structural Shift – Indices are Losing Relevance

India’s equity landscape is quietly evolving, with individual stock selection now playing a far greater role than simply tracking the index.

According to IKIGAI, an alternative investment firm led by seasoned mid-cap specialist Pankaj Tibrewal, market performance is increasingly being driven by a concentrated group of outperformers, while the majority of listed stocks are lagging behind.

In the final quarter of FY25, the Nifty 500 index slipped by 6.8%. However, the median return of its constituents was much deeper -12.8%, highlighting a growing divergence not seen in over a year. This gap, which began emerging in Q2 FY25, has only widened with time.

Corporate earnings reflect the same trend.

In Q3 FY25, just 16% of companies in the Nifty 50 reported profit growth exceeding 25%, a sharp drop from the five-year average of 37%. Within the broader Nifty 500, only a third of companies crossed that mark, compared to a historical norm of 40%. A significant portion of the overall earnings growth was driven by just a handful of firms.

This pattern of concentrated gains points to a phenomenon known as profit polarization, where broader market indices increasingly fail to represent the underlying dynamics.

Why Is This Happening?

• Liquidity has dried up: The post-pandemic rally was largely fueled by abundant capital. Now, with global monetary tightening, widespread market momentum has waned.

• Valuation adjustments: After a sharp correction in early 2025—where mid- and small-cap stocks lost 20–25%—investors have become more selective, favoring quality and earnings visibility

• Economic uncertainty: Factors like global trade disruptions, inflation, and supply chain instability have led investors to prioritize companies with more predictable earnings.

• Sectoral imbalances: Sectors such as public banks, energy, and utilities—known for low valuations but strong profits—are now heavily influencing index-level returns.

Implications for Investors

Headline valuations can be misleading. Excluding low-priced sectors like public enterprises, the Nifty 50 is currently trading ataround 26 times forward earnings—higher than the Nifty Midcap 150’s 23x multiple.

Meanwhile, many mid- and small-cap companies are on stronger footing: they have leaner balance sheets, reduced leverage, and are expected to deliver stronger earnings growth than their larger peers through FY24–27.

Bottom line: Passive index strategies may no longer be effective in this new market regime. Active, selective investing is becoming essential.