If you believe that small-cap or mid-cap stocks deliver faster earnings growth and higher return potential than , there is one important factor you should consider.
How much of that growth is broad-based, and how much comes from a few outliers?
According to a DSP Mutual Fund study, small- and mid-cap companies have delivered much faster profit growth than large caps over the full cycle from FY17 to Q1 FY27.
Aggregate profit after tax (PAT) grew at a compound annual growth rate (CAGR) of 14% for large caps, 21.2% for mid caps and 36.8% for small caps.
But the picture changes sharply when the best and worst 2% of stocks by aggregate PAT are excluded. Small-cap PAT CAGR falls to 24.8%, while mid-cap growth drops to 17.1%. Large-cap growth barely changes, from 14% to 13.5%.
Here’s what investors need to know.
Large caps: Steady revenue and earnings growth
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Large caps, comprising stocks ranked 1 to 100, recorded 13.5% revenue CAGR and 14% PAT CAGR since FY17.
The more recent period tells a similar story. From FY22 to TTM June 2026, revenue CAGR rose to 14.1%, while PAT CAGR increased to 15.8%.
Large caps have also been more consistent because they remained profitable throughout the period, with profit margins staying broadly within the 8%-13% range.
Mid caps: Strong earnings, helped by margins
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Mid-caps delivered 11.6% revenue CAGR but a much stronger 21.2% PAT CAGR since FY17.
This gap between revenue and profit growth is important. Mid-cap profit margins expanded from 6% in FY17 to 12.8% by TTM June 2026, meaning a significant portion of earnings growth came from margin recovery rather than revenue growth alone.
From FY22, mid-cap revenue CAGR slowed to 8.5%, while PAT still compounded at 20%. Margins rose from 8.3% to 12.8% during this period.
Small caps: The headline number needs context
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Small caps, ranked 251 and beyond, recorded the highest aggregate PAT CAGR at 36.8% since FY17, despite revenue growing at just 11.7%.
However, this is where investors need to be cautious. Small-cap margins increased dramatically from just 1.3% in FY17 to 8.4% by TTM June 2026.
The segment also experienced sharp swings in profitability, including an aggregate loss in FY18 and a 40% fall in PAT in FY20, followed by a 328% jump in FY21.
Since FY22, small-cap revenue CAGR improved to 12.4%, but PAT CAGR fell to just 13.7%. This is lower than the 15.8% recorded by large caps and the 20% by mid caps.
Why does the outlier effect matter?
The headline earnings growth can sometimes be influenced heavily by a handful of companies. To test how much this matters, the study removed the 2% of with the highest aggregate profits and the 2% with the lowest profits from each market-cap segment.
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Since FY17, small-cap PAT CAGR has fallen from 36.8% to 24.8% after removing these extreme performers. That is a decline of 12 percentage points. Large-cap PAT CAGR changes only slightly, from 14% to 13.5%.
The FY22 numbers offer another perspective.
After removing the 2% extremes, small-cap PAT CAGR actually rises from 13.7% to 15%. But the difference between large-cap and small-cap earnings growth becomes negligible after the top and bottom 2% of stocks are removed.
What does this mean for investors?
Small- and mid-cap earnings have grown faster, but the headline numbers should not be extrapolated blindly.
A significant part of their long-term earnings outperformance came from margin recovery and a relatively small number of exceptional performers. Large caps have delivered more consistent and broad-based earnings growth.
Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.