Smallcap, midcap indices sink 2% on heavy selling pressure, analysts say pain to continue

The smallcap index slipped into the bear territory amid a 20 percent crash from record highs.

As the weakness in the frontlines continued, the broader markets underperformed, with the key Nifty Smallcap 100 and Nifty Midcap 100 indices extending losses to sink almost two percent in early trade on February 17.

At 10.45 am, the Nifty Smallcap 100 index was 1.6 percent lower, while the Nifty Midcap 100 index sank 1.1 percent. In comparison, the benchmark Nifty 50 index was only half a percent lower at 22,842.80.

Experts have long warned about stretched valuations in the midcap and smallcap segments, but retail investors largely ignored the concerns. With froth building up in the market, a correction was inevitable, analysts said.

From their record highs, the Nifty Midcap 100 index has dropped 18.9 percent, while the smallcap index has entered a bear market, plunging 22 percent. The combined value erosion stands at around Rs 17 lakh crore, leaving investor portfolios deep in the red.

Selling pressure intensified further after US President Donald Trump imposed reciprocal tariffs on India, citing a high tariff differential between the two countries.

The selloff in mid- and small-cap stocks was also fueled by cautious remarks from ICICI Pru AMC’s CIO S Naren at a distributor conference. He advised against SIPs in mid and small-cap funds due to market volatility, triggering a debate in the industry.

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Amish Shah, Head of India Research at Bank of America Securities, remains wary of the broader market, arguing that mid and small-cap stocks remain overvalued despite recent corrections. He anticipates further declines in this segment, with returns potentially lagging or turning negative compared to large-cap stocks.

"We expect the Indian market to see a diverse performance across caps, sectors and stocks in the next few months. Large-cap indices and stocks may be range-bound, while several midcap, small-cap and ‘narrative’ stocks may see a sharper correction," analysts at Kotak Institutional Equities noted.

Looking ahead, the brokerage also expects the Street to adjust its fair valuation multiples for stocks and earnings assumptions of companies in light of the recent market correction. "This will be particularly evident in mid-cap, small-cap, and ‘narrative’ stocks, where valuations had largely become detached from reality," KIE said.

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