Most mid and small-cap stocks struggle despite benchmark rally in November

markets

After surging in September and October, India’s broader markets lost momentum in November even as the benchmark indices hovered near record levels, widening a growing divergence in the equity landscape.

The Sensex and Nifty advanced about 2 percent in November, but the headline buoyancy masked a far more fragile undercurrent. Through the month, the BSE MidCap index was virtually flat, while the BSE SmallCap index slipped 2.9 percent, its steepest monthly decline in three months.

Interestingly, the contrast with the previous months is stark. In October, the Sensex and Nifty had climbed 4.5 percent each, supported by strong gains of 4.7 percent in the BSE MidCap index and 3.2 percent in the BSE SmallCap index. September, too, saw healthier breadth, with the benchmark indices advancing 0.7 percent apiece and the broader MidCap and SmallCap gauges rising 0.6 percent and 1.5 percent respectively.

Analysts attributed the volatility to soft earnings in selected sectors, tighter liquidity as a heavy pipeline of IPOs drew capital away from secondary markets, and persistent global macro worries. Adding to the churn, investors have shown a preference for momentum in gold and silver rather than the fundamentals underpinning smaller companies.

Valuations remain a sticking point. The MidCap index trades at 25.79 times one-year forward earnings, higher than its 10-year average of 23.31 times. The SmallCap index, at 23.33 times, also stands well above its long-term average of 18.95.

This elevated positioning, experts warn, makes the segment vulnerable to swings, even if a deep correction is not immediately imminent. They caution that a 5 to 10 percent downside, or a slow, grinding consolidation over the next three to six months, cannot be dismissed.

Vishal Bajaj, Executive Director, Wealth at Client Associates, said mid- and small-cap equity categories continue to face redemption pressures, noting that they saw the highest outflows among diversified equity funds in October 2025, excluding thematic schemes. He advised staggered deployments over the next three to six months, anchored by a four- to five-year horizon.

The year’s scorecard reinforces the split. The MidCap index has gained only 1.44 percent in 2025, while the SmallCap index has declined 5.66 percent. Both remain 5.2 percent and 9.7 percent below their respective record highs. By contrast, the blue-chip Sensex and Nifty have risen nearly 10 percent each, signalling a decisive shift toward safety and liquidity.

Market breadth tells the same story. Of the 147 companies in the MidCap index, 77 have delivered negative returns in 2025, three have been unchanged and only 63 are in positive territory. The SmallCap pack looks even more strained: 853 of its 1,226 constituents are in the red, 30 are flat and 343 have managed gains.

Corporate earnings, however, offer a more layered picture. Brokerage Nuvama noted that profits for small and midcap companies accelerated sharply in the September quarter of FY26 after a subdued FY25, aided partly by a low base. Excluding BFSI, the rebound appears stronger and contrasts with the moderation in large caps. Still, SMID margins remain structurally weaker and more cyclical because of their growth-heavy profiles. A domestic slowdown had compressed margins through FY25, though early FY26 has brought some stabilisation. Large caps, interestingly, are now beginning to face relatively greater margin pressures.

Consensus forecasts point to a meaningful rise in SMID profitability through the second half of FY26 and into FY27. However, several high-frequency indicators, from power generation to steel consumption, have softened in recent months. Nuvama warns that if profit momentum falters, sustaining stretched valuation premiums may prove challenging.

Despite the turbulence, the long-term narrative for smaller companies remains constructive. Viraj Gandhi, CEO of SAMCO Mutual Fund, said small caps remain strong alpha generators, offering exposure to niche, high-growth pockets that larger firms cannot replicate. This, he said, should keep long-term investor interest firmly anchored in the space.

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