Kotak MF's 2026 Prediction: Mid-Caps Set to Lead Pack, Outperform Small-, Large-Cap Indices

The year 2025 is nearing its end. As investors step into the last month of the current year, the anticipation regarding what 2026 holds for D-Street is increasing. Amid this anticipation, Kotak Mutual Fund has released its Market Outlook 2026 report.

In a release following the report, Nilesh Shah, managing director of Kotak Mahindra AMC shared his projection for the coming year. Shah has projected that mid-cap stocks are set to overtake both large-cap and small-cap stocks. He added that while the growth on D-Street is set to be anchored by a strong recovery in earnings growth in the coming quarters, the outperformance of the mid-cap space may be narrow.

“Equity returns in FY2026 are likely to be anchored in earnings growth, with India Inc expected to deliver double-digit growth in FY27. This strength is likely to attract foreign portfolio investors, supporting market liquidity. Mid-caps are poised to outperform large- and small-caps, though the margin of outperformance may remain narrow,” Shah said.

The bullish prediction comes at a time when Indian markets have climbed to fresh all-time highs and dealt with several headwinds, such as US President Donald Trump’s tariff-based trade disruptions, geopolitical instability in several corners of the world and a slow recovery in consumer demand.

So far, in 2025, the large-cap space represented by Nifty 50 has climbed 9.64 per cent, the mid-cap space represented by the Nifty MidCap index has risen 4.95 per cent, and the Nifty SmallCap index has declined 7.13 per cent.

Factors Behind MidCap’s Likely Outperformance

Kotak Mutual Fund’s confidence in the future performance of mid-cap stocks is driven by three key factors: an outlook projecting robust earning growth, rise in domestic consumption, and favourable valuations for mid-caps.

Rise In Domestic Consumption

According to the report, D-Street is likely to witness an acceleration in earnings largely driven by domestic consumption. The asset management company expects several moves announced by the Centre in 2025 to boost consumption. These include the income tax rebates announced as a part of the Union Budget, the recently-announced Goods and Services Tax (GST) rate cuts, Reserve Bank of India’s (RBI’s) 100 basis point (bps) interest rate cuts, and the 8th Pay Commission. This push is expected to benefit mid-cap companies as they are typically more domestic demand focused across sectors compared to their larger peers which may be more export-oriented.

Double Digit Earnings Growth

Kotak Mutual Fund expects equity returns to be driven strongly by a recovery in earnings and strong earnings growth. The report projects that Indian companies will generate double-digit earnings growth in FY27. The report projected that the MSCI India Index Earnings Per Share (EPS) Growth is expected to jump from 10 per cent at the end of FY26 to 16 per cent at the end of FY27. The 600 bps EPS growth in FY27 hints at a strong recovery which mid-caps are likely to benefit from.

Relative Valuations

According to Kotak Mutual Fund, the Nifty 50 index is trading close to its long-term average price to equity (P/E) ratio of 21.5x while the broader market shows a trend of divergence. The Nifty Smallcap 100 is trading at a "significant premium" of 25.1x compared to a long-term average of 16.7x, indicating the likelihood of volatility in the SmallCap space, it said.

While the Nifty Midcap 100 is also trading at a premium to its historical averages (29.2x) compared to 23.1x, mid-caps are relatively more likely to capture the momentum caused by the projected earnings growth and boost in domestic consumption compared to saturated large caps or relatively expensive small-cap stocks.

What Should Investors Do In 2026?

While the outlook for the upcoming quarters seems optimistic, Shah urged investors to moderate their expectations. The report also showed that at present, 73 per cent of NSE-500 stocks are trading lower by more than 10 per cent from their 52-week highs.

“Investors are advised to moderate return expectations and adopt a balanced, diversified approach across asset classes to navigate evolving market dynamics,” Shah said.

To conclude, while the findings of the report suggest that mid-cap stocks may outperform stocks from the large-cap and small-cap space, ultimately a diversified portfolio is important to prepare for rapidly changing market dynamics.