The BSE Smallcap index remains 6% away from its peak as the recent surge has been powered by select heavyweight largecaps in the benchmark indices. Even within the largecap universe, the story splinters further—banks are scaling all-time highs while IT stocks languish in bear market territory, down roughly 22% from peak levels.
This tale of two markets is hitting where it hurts. With banks and IT being the two biggest sectors, even many institutional portfolios are failing to capture the optimism radiating from headline indices.
“The ongoing Nifty upward move is being led by some of the index heavyweights,” says Pradeep Gupta, Executive Director and Head of Investments India at Lighthouse Canton. “The index masks weakness in the broader market with nearly two-thirds of the smallcaps giving a negative return in the last one year.”
It’s a classic case of large caps leading the charge. “Conventionally speaking, largecaps tend to lead any turnaround or relief rally while broader market momentum or participation comes in with a lag,” Gupta explains. “Pain in smallcaps has been far more pronounced.”
The culprits behind smallcap weakness are piling up: macroeconomic distortions, margin pressures, profit booking, and weak earnings prospects, all compounded by shaky sentiment. Valuations aren’t helping either, with the segment trading at about 24 times FY26 earnings.Adding fuel to the fire, Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, points to another pressure point: “The recent underperformance in small- and mid-cap stocks can be attributed to profit-booking and the sharp rise in new IPOs that have drawn liquidity away from already-listed counters.”But there’s a silver lining emerging. “We are of the belief that a sizable part of earnings derating is behind us,” says Gupta. “One of the interesting highlights of the ongoing Q2 results is that small and mid-cap earnings are expected to grow much faster than large caps.”
The experts see pockets of opportunity. “Despite their underperformance, there are still pockets of opportunity available at reasonable valuations, thus warranting bottom-up anchoring,” Gupta adds. Lower interest rate susceptibility and improving macroeconomic conditions could provide tailwinds, though he cautions investors to proceed carefully.
Jain strikes an optimistic note for patient investors: “We remain positive on small- and mid-cap stocks from a medium-term perspective. With valuations now more reasonable and earnings visibility improving, this segment is well placed to deliver strong returns.”
However, the playbook going forward won’t be about broad baskets. Palak Shah, Director of Institutional Sales at PL Capital, is blunt: “Stocks will not perform as a basket of mid, small or large cap. Action will be stock specific and focus will be more on the ability of managements to create scale at a quick pace.”
For largecaps, the equation is simpler. “Largecaps are more or less proven names and improving macros always lead to re-rating in large cap names,” Shah notes.
The bottom line? If your portfolio feels left out of the current rally, you’re experiencing the market’s split personality firsthand. Q2 earnings for smaller companies will be the critical test to determine whether a turnaround is truly underway. Until then, investors may need to reconcile themselves to a market where the headlines tell only half the story.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)