Midcaps make smart comeback in 2025 as earnings, flows turn favorable; is the rally here to stay?

Looking ahead, analysts believe midcaps are well-positioned to sustain their momentum, barring any major negative surprises.

Midcap stocks are firmly back in favour after a shaky start to 2025, with analysts expecting the rally to sustain—provided domestic earnings, liquidity conditions, and global cues continue to align. With inflation softening, foreign flows reviving, and valuations turning favourable after a steep correction, the midcap space may have enough steam in the engine to gain further.

"Given the favourable macros, visible earnings growth, and the deep correction witnessed since October last year, midcaps are well-positioned to continue their upward trajectory unless fresh negative triggers emerge," said Rajesh Palviya, Head of Technical Research at Axis Securities.

Also read: Mid, smallcap indices extend rally for 5th day, outperform benchmarks; Titagarh, Cochin Shipyard rise up to 15%

The Nifty Midcap 100 index, which had tumbled nearly 16 percent between January and April 9—when US President Donald Trump announced a 90-day pause on reciprocal tariffs, has since clawed back most of its losses and is now trading just 0.3 percent lower YTD.

Ruchit Jain, Vice President of Technical Research at Motilal Oswal, added that easing geopolitical tensions, a softer dollar index, and the return of foreign inflows will likely keep the momentum going. Furthermore, experts say that Thursday’s strong Rs 5,393 crore buy by foreign investors reinforces the view that FIIs are still committed to Indian equities, even amid fears of a potential shift to cheaper Chinese stocks.

This recovery has been broad-based. What began as a narrow rebound led by NBFCs and defence stocks has expanded to include metals, real estate, automobiles, and other rate-sensitive sectors benefiting from easing inflation and the prospect of continued policy support.

Read more: India’s defence budget may receive boost of Rs 50,000 crore after Operation Sindoor, says report

Analysts attribute the sharp turnaround to a mix of improved sentiment, better-than-expected earnings, and fresh buying from both domestic and foreign investors. Initially led by domestic institutional investors (DIIs) and retail participants, the rally has gained firmer ground with the return of foreign portfolio investors, reinforcing confidence across the board.

Palviya noted that the rally gathered pace as several midcap companies delivered strong quarterly numbers.

Meanwhile, smallcaps—though still lagging—are slowly finding favour again. The segment remains down roughly 6.5 percent year-to-date, but analysts say selective opportunities are emerging. Jain, however, advised caution. "This is not a market where all smallcaps will rise indiscriminately. Investors must focus on names with clear earnings visibility. The room for error is much narrower here," he warned.

Looking ahead, analysts believe midcaps are well-positioned to sustain their momentum, barring any major negative surprises. Earnings visibility, monsoon progress, inflation trends, and global cues are all supportive for now, keeping sentiment bullish.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to consult certified experts before making any investment decisions.