The midcap and smallcap indices have faced a steep decline, rattling retail investors who had poured in significant capital over the past year. The Nifty Smallcap 100 has dropped 2.4 per cent, while the Nifty Midcap 100 has plunged 2 per cent in a single trading session. This comes after a broader correction in February, where the BSE Smallcap index crashed 14 per cent and the Nifty Midcap 100 tumbled 10.8 per cent. Experts have long cautioned about frothy valuations in this space, and the recent sell-off has proven those fears right. But does this signal a deeper, long-term issue?
What’s driving the downfall?
The relentless selling in small and midcap stocks stems from a mix of overvaluation, weak earnings, and technical breakdowns. Many stocks had surged to unsustainable levels, leaving them vulnerable to sharp corrections. Liquidity has also dried up, as domestic investors shift focus from smallcaps to largecaps amid concerns over economic slowdown and political uncertainty.
Earnings disappointment adds to the pressure
Adding fuel to the fire is the recent underwhelming earnings performance of many small and midcap companies. Rising costs, weakening demand, and sector-specific headwinds have eroded profitability, leading to earnings downgrades. Investors who were betting on strong earnings growth to justify high valuations are now facing the reality that many companies in this segment may struggle to meet expectations in FY25.
Technical breakdown suggests further pain ahead From a technical perspective, market experts see further downside risks. The Nifty Midcap 100 has slipped below its 100-week Exponential Moving Average (EMA) for the first time since 2020, indicating weakening momentum. The Nifty Smallcap 100 has remained below its 100-week EMA for three consecutive weeks. Both indices have broken critical support levels, with key retracement zones suggesting further potential declines of 5-7 per cent in the near term
Where should investors focus now?
Rather than chasing momentum, investors should now look at sectors that have strong fundamentals and reasonable valuations. Defensive plays like pharma and select IT stocks could offer stability. Largecaps may continue to outperform in the near term, but certain midcap names with strong balance sheets and growth potential could make a comeback.
Stocks that took the hardest hit
| Stock | February Fall (%) |
|---|---|
| Suratwwala Business Group | -66 |
| Best Agrolife | -50 |
| WPIL | -45 |
| Precision Camshafts | -44 |
| Vakrangee | -42 |
| Zen Technologies | -40 |
| Tilaknagar Industries | -40 |
| Senco Gold | -38 |
| Vishnu Prakash R Punglia | -37 |
| Kirloskar Oil Engines | -36 |
The road ahead: A stock-picker’s market
Market history suggests that midcaps and smallcaps go through cycles of steep corrections before rebounding strongly. However, the key takeaway from past corrections is that indiscriminate buying rarely works. For now, investors should brace for more turbulence but use the correction as an opportunity to accumulate fundamentally strong stocks at reasonable valuations. As liquidity dynamics evolve and earnings clarity emerges, the broader market could stabilize in the coming months, setting the stage for the next leg of growth.
