Middle-cap, small-cap stocks to shine amid improving the sentiment of the market, says Geojit 'Vinod Nair | Einsmark news

The Indian stock market underwent a correction phase from 27 September 2024 to 7 April 2025 – a team of 192 days, or about six and a half months. This consolidation was caused, as India’s total market cap (BSE) rose to £ 4.8 trillion in Sept 2024, which printed the estimated market cap to GDP (MCAP/GDP) to 145% based on the FY24 nominal GDP, far above the ten years of ~ 90%. This rally followed the euphoric victory on the third term of the current government in the June 2024 national election. However, the optimism was short -lived, as corporate earnings for FY25 dropped sharply. Nifty EPS growth has been downgraded to just 5% year, a significant decline from the 15% predicted at the beginning of the financial year. What derailed earnings? Several factors have contributed to the slowdown of earnings: Regular elections: Nine state elections and one national election in FY25 have led to a significant reduction in both general and capital government spending. Poor question: Rural and urban consumption was struck by an uneven monsoon, heat waves, high food inflation and sluggish wage growth. Global Headwinds: Increased global inflation has affected corporate top lines and ebitda margins, which have compressed the profit margins. As a result, the broader Indian market corrected with 20%, making the middle and small cap stocks more attractive nowadays due to both price and valuation corrections. The Nifty Midsmallcap 400 index had an intraday correction of 25% during this period. Signs of a turnaround The recent Q4 FY25 earnings season has brought encouraging signs. Companies in the Nifty 500 reported 10.5% earnings growth much better than estimated and slightly better than large caps. This indicates a revival in mid and small cap earnings. The last two quarters show back earnings cyclical growth. The wholesale price index (WPI), which reflects corporate inflation, dropped to 0.85% in April from an average of 2.25% in the first quarter of 2025. Prospects for FY26 The momentum is expected to continue in the first quarter of the FY26 (June quarter), supported by: Falling inflation: Lower input costs increase the margins. Rising disposable income: Thanks to tax cuts announced in the 2025-26 budget. Increased government spending: Fiscal activity after the election is picking up. Decrease in interest rates: Lower borrowing costs are expected to encourage consumption and investment. These factors are likely to increase the growth and profitability of revenue in sectors. A broader sentiment of market rebound Market also improves due to the relief of global and domestic risks. A break in global trading tension and reduced geopolitical risks in Central Asia, the Gulf and the India-Pakistan region are increasing investor confidence. The probability of a US recession in 2026 also decreases and further supports world stability. This improved macro background has created a preliminary rally in the middle and small cap stocks, with a renewed interest from both FIIs and retail investors. Valuation perspective Historically, Indian mid -cap has traded at a premium for large caps. In 2024, this premium peaked at 67%, compared to an average of five years of 33%. During the recent correction, the premium dropped significantly and now stands at 36%-a level that indicates strong long-term buying opportunities, especially if earnings fall back in the first quarter of the first quarter of FY26. The author, Vinod Nair, is head of research at Geojit Financial Services. Disclaimer: The views and recommendations above are those of individual analysts or brokerage companies, and not of currency. We advise investors to check with certified experts before making investment decisions.