Large-Cap Stocks Seen to Have Weathered Market Correction, Mid- and Small-Cap Equities Face Continued Challenges

Market Update: Iran War-Driven Oil Risks and Its Impact on Indian Markets

Key Highlights:

• Large-cap stocks have seen a significant correction, with valuations pulled down to April 2025 lows, indicating that markets have been sufficiently punished for weak EPS growth.
• Midcap and small-cap space still faces pain, with abnormally high valuations in the range of 25x-30x.
• Large-cap IT is considered an attractive, cash-rich, deep-value contra buy for investors with a 6-8 year horizon, but may not provide quick returns.

Market Outlook:

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The ongoing bear phase and Iran war-driven oil risks have led to a significant correction in the market. However, the correction looks complete for large caps, with valuations pulled down to April 2025 lows. Midcap and small-cap space still faces pain, with abnormally high valuations in the range of 25x-30x.

Geopolitical Risks:

A blockade of the Strait of Hormuz can trigger a global economic crisis, as it accounts for nearly 20% of daily global LNG and oil transportation. If the tensions persist, it may lead to a short-term spike in inflation globally.

Energy Market:

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Blockage may not last beyond March 2026, but if it does, Russia may emerge as a big winner, with a well-established supply chain infrastructure across Asia and Europe. The US and Russia can rise as global providers of energy security.

Interest Rate Cuts:

The RBI may not rule out further interest rate cuts in the current calendar year, but any cuts will be more of a reaction to a US recession or AI-driven mass layoffs rather than independent policy decisions.

IT Sector:

Large-cap IT companies are trading at a 10-20% discount to the Nifty 50 and are undergoing a transition from the man-hour model to an outcome-oriented model, making them attractive contra buys for investors with a 6-8 year horizon.