Experts say the rally in midcaps is more than just a catch-up trade — it’s a story driven by fundamentals. Ajit Mishra, Senior Vice President at Religare Broking, attributes the midcap surge to “a mix of factors — strong earnings performance, valuation comfort, and improving investor sentiment.” He adds that “several companies in the midcap space have delivered better-than-expected Q2 results, reflecting earnings catch-up and operational resilience in a challenging environment.”
This resilience, Mishra explains, follows a period of time correction earlier this year that made valuations more reasonable and rekindled buying interest. “Many of these companies also boast strong balance sheets, healthy cash flows, and focused execution, reinforcing confidence in their long-term potential,” he says. The result: investors are “increasingly favoring quality midcaps that combine earnings growth, improving fundamentals, and relative valuation appeal,” driving sustained outperformance versus select largecaps and smallcaps.
Rajesh Palviya, Vice President at Axis Securities, echoes the sentiment, pointing out that “the strength of the Nifty Midcap 100 in recent months reflects improving earnings momentum, stronger balance sheets, and healthy domestic liquidity.” He notes that several sectors such as industrials, capital goods, and auto ancillaries have reported better-than-expected results for Q2, with valuations that had earlier corrected creating a “favourable opportunity for a catch-up rally.” The rally, he emphasizes, “appears to be fundamentally supported rather than solely driven by sentiment,” signalling “renewed institutional confidence in high-quality midcap companies.”
Some prominent names that have given superior returns include Biocon, Federal Bank, Nalco, Hitachi Energy, IDFC First Bank, Muthoot Finance, Max Financials. To be sure, L&T Finance has already doubled investor money in the last year.
Valuations: comfort or concern?
While earnings tailwinds are evident, the question of valuation looms large. Midcaps are now trading at a premium to largecaps — a gap some say is justified, but not without risk. Mishra believes that “midcap valuations continue to trade at a premium to largecaps, largely justified by the stronger earnings growth and operational resilience these companies have demonstrated over the past few quarters.”
However, he cautions that “valuations in certain segments do leave limited cushion if earnings momentum slows.” According to him, while the market seems to be factoring in continued strength in earnings and margin recovery in the second half, “risks from potential downgrades or cost pressures can’t be ruled out.” The key, he stresses, is selectivity.
Palviya agrees that valuations have heated up after the recent rally. “Midcap valuations have increased due to the recent rally and are now trading at a premium compared to long-term averages, narrowing the gap with large-cap stocks,” he observes. He warns that the market “might be underestimating the risk of downgrades in certain sub-segments, especially where valuations are significantly outpacing fundamentals.”
Sectoral dynamics: broad-based but selective
Experts agree the rally is fairly broad-based, though certain sectors are clearly leading. Industrial, capital goods, and auto ancillary companies are at the forefront, benefiting from steady demand, margin recovery, and the ongoing capex cycle. Financials and select PSUs have supported the momentum with improving profitability and asset quality, while consumer durables and chemicals have seen mixed trends due to uneven demand and pricing pressures.
Palviya maintains a positive outlook on financials, power, and select consumer discretionary plays but remains cautious on “areas where valuations have exceeded fundamental growth,” suggesting some profit-taking may be on the cards.
Outlook: can midcaps sustain the lead?
Looking ahead, experts expect midcaps to stay resilient — but with moderation. Mishra cautions that “midcap outperformance may see some moderation ahead, as valuations have moved up and global volatility could influence near-term sentiment.” Yet, he adds, “the earnings momentum, improving balance sheets, and steady domestic inflows continue to support the space.”
Palviya says with current valuations at elevated levels, this performance’s sustainability relies on consistent earnings growth and stable macroeconomic conditions.
While foreign investors remain more inclined toward largecaps, analysts say that strong domestic inflows — from mutual funds and retail investors — are fueling midcap space. As Mishra puts it, “a partial rotation toward largecaps cannot be ruled out if market risk appetite softens, but as long as earnings delivery holds up, midcaps are likely to remain well-positioned.”
(Disclaimer: The recommendations, suggestions, views, and opinions expressed by experts are their own and do not represent the views of The Economic Times)