Market rout deepens: Midcaps and smallcaps enter bear territory, crash 20% from record highs

The smallcap and midcap indices sharply underperformed the benchmarks.

The bloodbath in the Indian equity market showed no signs of easing, extending its losing streak to a sixth consecutive session on February 12, with small and midcaps taking the hardest hit. The relentless selling pressure over the past two months has dragged the broader market into bear territory, with midcap and smallcap indices plunging nearly 20 percent from their record highs.

The Nifty Smallcap index has crashed over 20 percent from its all-time high in December 2024, while Nifty midcap has plunged more than 18 percent from the peak that it scaled in September last year.

A culmination of domestic and global headwinds have been the culprits behind the sharp correction that has roiled the market in recent times. Donald Trump's fresh tariff strike, fears of a multi-front global trade war, a sliding rupee, subdued Q3 earnings, a slower-than-expected rate cut cycle, and relentless FII outflows have strengthened the bears' grip on the market.

At 10.08 am, the Nifty Midcap and Nifty Smallcap indices were trading 2-3 percent lower, sharply underperforming the benchmarks. So far for the week, the Nifty Smallcap and Nifty Midcap have slid over 7 percent each.

At the same time, the Sensex was trading 785.41 points or 1.03 percent lower at 75,508.19, and the Nifty was down 237.00 points or 1.03 percent at 22,834.80. Given the sharp broad-based selling, market breadth tilted heavily in favour of laggards as six stocks fell for each one that rose. About 453 shares rose, 2,824 fell and 84 remained unchanged.

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Looking ahead, Pankaj Tibrewal, Founder & CIO of IKIGAI Asset Managers, told CNBC-TV18 that market breadth will narrow further, eventually transitioning into a stock picker's market. Echoing similar sentiments, VK Vijayakumar of Geojit Financial Services feels that investors can utilise the current weakness in the market to switch from the mid and smallcaps, which are even now overvalued, to the fairly valued largecaps.

Meanwhile, analysts at Nuvama Institutional Equities share a much darker outlook for the broader market, suggesting that the bear grip on the space hints at prolonged pain for small and midcaps.

"The current market correction exhibits characteristics of a bear market, as the slowdown is now driven by domestic credit. Moreover, broader market PAT growth (excluding BFSI) has slipped into contraction. Durable liquidity has turned deficit for the first time in the 2020s, and despite the recent correction, small and midcap valuations remain steep—hinting at further downside ahead," the brokerage stated in a recent note.

Nuvama further notes that in past bear markets, cyclicals—including industrials, real estate, NBFCs, and PSU banks—typically corrected by over 50 percent. While some stocks have already seen similar correction this time, valuations remain elevated, and margins are still high, which according to the brokerages, leaves them vulnerable to deeper earnings cuts amid a slowing demand environment.

Given this backdrop, Nuvama sees value in exporters, where the downturn has already been steep, as well as in domestic laggards such as cement, durables, QSR, and retail—sectors that experienced an early slowdown and are now seeing corrective actions driven by compressed margins.

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