The BSE Smallcap index remains 6% away from its peak as the recent rise was driven by select heavyweight largecaps in the benchmark indices. Even within the large cap universe, the story continues to fragment: banks are scaling their all-time highs, while IT stocks are languishing in bear market territory, down about 22% from their peak levels.
This tale of two markets hits where it hurts. With banking and IT being the two largest sectors, even many institutional portfolios fail to capture the optimism radiating from the major indices.
“Nifty’s continued upward movement is led by some of the index heavyweights,” said Pradeep Gupta, executive director and head of India investments at Lighthouse Canton. “The index masks weakness in the broader market, with almost two-thirds of small caps posting negative returns over the past year.”
It’s a classic case of large caps leading the way. “Conventionally, large caps tend to lead any reversal or relief rally, while broader market momentum or participation comes with a lag,” explains Gupta. “The pain in small caps is much more pronounced.”
The causes of small cap weakness are piling up: macroeconomic disruptions, margin pressure, profit booking and weak earnings prospects, all compounded by shaky sentiment. Valuations don’t help either, with the segment trading at around 24 times FY26 earnings. Adding fuel to the fire, Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, points out another pressure point: “The recent underperformance of small and mid-cap stocks can be attributed to profit booking and the sharp rise in new IPOs that have drained liquidity from already listed counters.” But there is a bright spot emerging. “We believe that a significant portion of the profit loss is behind us,” said Gupta. “One of the interesting highlights of the ongoing second quarter results is that small- and mid-cap earnings are expected to grow much faster than large caps.”
The experts see opportunities. “Despite their underperformance, there are still opportunities available at reasonable valuations, which warrants bottom-up anchoring,” added Gupta. Lower interest rate sensitivity and improving macroeconomic conditions could provide tailwinds, although he warns investors to proceed cautiously.
Jain is bullish for patient investors: “We remain positive on small and mid-cap stocks from a medium-term perspective. As valuations have become more reasonable and earnings visibility is improving, this segment is well positioned to deliver strong returns.”
However, the playbook for the future will not be about broad baskets. Palak Shah, Director of Institutional Sales at PL Capital, is blunt: “Stocks will not perform like a basket of mid, small or large caps. The action will be stock-specific and the focus will be more on management’s ability to build scale at a rapid pace.”
For large caps the comparison is simpler. “Large caps are more or less proven names and improving macros always leads to revaluation of large cap names,” notes Shah.
The end result? If your portfolio feels left out of the current rally, you are experiencing the market’s split personality firsthand. Second-quarter earnings results for smaller companies will be the crucial test to determine whether a turnaround is truly underway. Until then, investors may have to reconcile with a market where headlines tell only half the story.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by experts are their own. These do not represent the views of the Economic Times)
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