New Delhi: Smaller stocks lagged behind their bigger blue-chip peer Sensex this year as elevated valuations triggered profit-booking after a strong rally in the last two years. Analysts attributed the underperformance
of smallcap and midcap indices in 2025 due to market normalisation after their exceptional outperformance in 2023 and 2024.
Depreciation of the rupee, concerns over the US-India trade negotiations and persistent foreign fund outflows also led to a sharp risk-off reaction in the broader market, experts noted. On the road ahead, market experts are of the view that the outlook for smallcap and midcap indices remains cautiously optimistic. They said that as valuations cool and earnings visibility improves, selective opportunities should emerge, supported by India's steady GDP growth and strong domestic liquidity.
Till December 24 this year, the BSE midcap gauge went up marginally by 360.25 points or 0.77 per cent. The BSE smallcap index, however, declined by 3,686.98 points or 6.68 per cent. In contrast, the 30-share BSE Sensex jumped 7,269.69 points or 9.30 per cent during the period under review. "The underperformance of smallcap and midcap indices in 2025 is primarily a result of market normalisation after two years of exceptional outperformance.
"In 2024, the BSE smallcap index delivered returns of over 29 per cent, while the midcap index gained 26 per cent, far outperforming the Sensex. Such sharp rallies pushed valuations to elevated levels, especially in smaller companies where earnings growth did not keep pace with price appreciation," Ponmudi R, CEO - Enrich Money, an online trading and wealth tech firm, said.
In 2025, this imbalance began to correct, he said. "Investors shifted focus toward largecap stocks with stronger balance sheets and stable earnings visibility amid global uncertainty. Smallcap and midcap companies, which are more sensitive to funding costs, margin pressures, and economic slowdowns, faced higher volatility. As a result, capital rotated toward blue-chip stocks, leading to relative underperformance in the broader market segments," Ponmudi said.
According to market analysts, smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms. N ArunaGiri, CEO of TrustLine Holdings, a Equity Research and Asset Management firm, said, when markets undergo a time correction, as they have since September 2024, it is well understood that small and midcap stocks tend to underperform. "This is a natural outcome given their higher beta and greater sensitivity to liquidity and risk appetite. In that sense, the relative underperformance of small and midcaps versus the Sensex and Nifty this year is not surprising," he said.
The abrupt depreciation of the rupee, triggered by anxiety around US-India trade negotiations and persistent FII (Foreign Institutional Investors) outflows, led to a sharp risk-off reaction in the broader market, ArunaGiri said. The BSE midcap gauge hit its 52-week high of 47,549.4 on November 18, this year. The index had scaled its record high of 49,701.15 on September 24, last year. The BSE smallcap index hit its one-year high of 56,497.39 on January 3, 2025 while it tumbled to its 52-week low of 41,013.68 on April 7.
The Sensex reached its lifetime peak of 86,159.02 on December 1, this year. "Concerns around a potential India-US trade deal since February increased uncertainty, while a weakening rupee and elevated valuations triggered profit-booking. Persistent foreign institutional investor selling further pressured the segment, as FIIs preferred the relative safety of largecap stocks. Slower earnings momentum and tighter global liquidity also led to a clear rotation away from smaller companies," Ravi Singh, Chief Research Officer from Master Capital Services, said.
The midcap index tracks companies with a market value that is on average one-fifth of blue-chips, while smallcap firms are almost a tenth of that universe. Last year, the BSE benchmark Sensex jumped 5,898.75 points or 8.16 per cent, and the Nifty surged 1,913.4 points or 8.80 per cent. The BSE smallcap gauge climbed 12,506.84 points or 29.30 per cent and the midcap index jumped 9,605.44 points or 26.07 per cent last year.
"The road ahead for smallcap and midcap indices appears cautiously optimistic. As valuations cool and earnings visibility improves, selective opportunities should emerge, supported by India's steady GDP growth and strong domestic liquidity. Largecaps may continue to offer stability, while broader markets could outperform on earnings recovery," Singh of Master Capital Services, said. In 2023, the BSE benchmark had jumped 11,399.52 points or 18.73 per cent. The BSE smallcap gauge had rallied 13,746.97 points or 47.52 per cent in 2023, while the midcap index climbed 11,524.72 points or 45.52 per cent.
In 2022, the BSE midcap index climbed 344.42 points or 1.37 per cent, while the smallcap gauge declined 530.97 points or 1.80 per cent. The BSE barometer ended 2022 with an annual gain of 4.44 per cent or 2,586.92 points. "After the correction seen in 2025, valuations in quality midcap stocks have become more reasonable compared to their peak levels. However, broad-based rallies are unlikely unless earnings growth improves meaningfully. The next phase of market performance is expected to be driven by fundamentals rather than liquidity," Ponmudi of Enrich Money noted.
ArunaGiri said, from here, we believe the currency becomes the key variable. "As the rupee stabilises and gradually normalises toward its historical REER (Real Effective Exchange Rate) averages, the pressure on broader market valuations should ease. In such a scenario, we expect small and midcaps to recover meaningfully, narrowing the performance gap with largecaps," he added.
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