In the past five days, the Nifty has risen 2%, and over the last two months, it has delivered steady gains of nearly 5%, led by bellwethers like HDFC Bank, ICICI Bank, Nestle India, and Bajaj Finance. The primary reason for this lies in the sector composition and weightage of the Nifty index — its gains are concentrated in high-weight sectors like banks and oil and gas, which dominate index performance.
Yet data collated from Ace Equity shows nearly 70% of the stocks in smallcap stocks declined in the past one week. It should be also noted that the Nifty smallcap250 index is 8% off the highs. Still, while largecap stocks have benefited from turnaround in foreign flows, analysts say smaller companies are still grappling with margin pressures, tight liquidity, and weaker earnings visibility.
“Many smallcaps still remain highly sensitive to interest rate movements and macro swings, prompting investors to stay cautious,” said Kush Gupta, Director at SKG Investment & Advisory.
Smallcaps were the darlings of the market just a year ago, soaring 70–80% between mid-2023 and early 2025, but that very rally has now turned into an overhang. “Valuations became unsustainably high,” said Vinit Bolinjkar, Head of Research at Ventura Securities. “Liquidity withdrawal, profit booking by FPIs, and lack of visible earnings recovery have hit small and midcap markets harder.”
Bolinjkar said the smallcap segment now trades at about 24 times FY26 earnings, compared to 18 times for the Nifty, making it less attractive amid global uncertainties. He added that market participants are awaiting the Q2 earnings season for smaller companies to confirm whether a turnaround is underway.For now, investors prefer the comfort of largecaps. “Large caps typically lead market recoveries, particularly when foreign portfolio inflows resume,” said Sorbh Gupta, Head – Equity at Bajaj Finserv AMC. “They move faster due to their scale and liquidity. But that does not mean everything in the broader market is overvalued. There continue to be pockets of value within midcaps and smallcaps.”According to Pranay Aggarwal, CEO at Stoxkart, the divergence between the Nifty and smallcap performance is also linked to narrow market breadth, muted institutional flows, and high valuations.
“Large-cap heavyweights in financials and consumer durables are driving index gains, while risk aversion keeps investors away from volatile smallcaps. However, a rebound is likely from early 2026 as valuations become attractive and sector tailwinds emerge in autos, healthcare, and infrastructure,” he said.
Is there growth visibility in next few quarters?
Despite the current gloom, experts believe the setup for smallcaps could improve over the next few quarters. As India’s cyclical recovery strengthens and consumption stabilizes, capital rotation toward smaller companies may resume.
“Historically, smallcap indices lag broad-market rallies but catch up once liquidity and investor focus shift,” said SKG’s Gupta. “Valuations for many smallcap stocks have corrected, enhancing their attractiveness for patient investors. The festive season could also support demand-sensitive smallcap businesses.”
The coming quarters could thus mark the start of a gradual recovery. Bolinjkar expects the segment to stay range-bound or underperform in the near term but sees the possibility of a rebound once earnings visibility improves. “If Q2 results show robust growth, investor confidence may return, driving recovery into the new Samvat year 2082,” he said.
Most analysts agree that while large and midcaps are the safer bets for now, selective opportunities remain in quality smallcaps — especially those with strong balance sheets, improving cash flows, and exposure to domestic consumption themes.
Bajaj Finserv AMC’s Sorbh Gupta said Cyclical macro recoveries in the Indian economy create favourable conditions benefitting small caps. With earnings upgrades expected in coming quarters, well-constructed portfolios of quality smallcap stocks can offer decent returns.
All in all, while the Nifty fireworks have lit up Dalal Street ahead of Diwali, the smallcap segment is still waiting for its spark. For investors, patience and selectivity will likely be key as the broader market readies for a rotation — one that could finally lift the retail-heavy portfolios that have missed the party so far.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)