Small and Midcap Stocks: A Cautious Optimism Amid Market Shifts

In 2025, small and midcap stocks lagged behind their blue-chip counterparts due to market normalization and external economic factors. Analysts expect cautious optimism for these stocks as earnings visibility improves and market conditions stabilize, supported by India's GDP growth and domestic liquidity.

The small and midcap stocks have underperformed their blue-chip counterparts in 2025, as the market undergoes a process of normalization following stellar performances in previous years. Elevated valuations and external economic pressures like rupee depreciation and trade negotiation anxieties have also contributed to the downturn, according to analysts.

Key market participants note that small and midcaps suffered from volatility linked to foreign fund outflows and investors shifting focus to large-cap stocks for stability. These smaller stocks, prone to higher sensitivity in liquidity and risk preferences, faced challenges in maintaining momentum amid broader economic uncertainties.

Despite the current underperformance, market analysts maintain a cautiously optimistic outlook for small and midcap stocks. They anticipate that as valuations drop and earnings visibility increases, opportunities will arise, buoyed by India's strong GDP growth and domestic financial conditions. However, a broad-based rally would rely significantly on improved earnings growth, they caution.

(With inputs from agencies.)