Why are small, midcaps resilient despite market weakness? Here are a few clues

he midcap index has not only recovered earlier losses but is now trading in the green for the year, while the smallcap index, though still down 5 percent year-to-date

Even as benchmark indices Sensex and Nifty have retreated over the past two sessions, India's mid and smallcap segments have shown surprising strength, outperforming the largecap names and signalling renewed investor confidence in the space. At about 1:50 pm, the two were up 0.2 and 0.4 percent each.

This divergence in performance comes amid what many analysts describe as the maturing phase of a fresh uptrend that began roughly over a month ago when US President Donald Trump announced a 90-day pause on tariffs. According to Ruchit Jain, Senior Vice President of Technical Research at Motilal Oswal, the broader market has entered a new upward trajectory following its recent low, and such phases are typically marked by increased activity in mid and smallcap stocks. "The market breadth continues to remain healthy despite the headline index consolidation," he added.

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The resilience of the broader markets is not just technical—it’s being underpinned by improved earnings visibility, easing inflation, and a rebound in foreign inflows. Rajesh Palviya, Head of Research at Axis Securities, said the correction that midcaps endured since October last year has reset valuations to more attractive levels. “Given the favourable macros, visible earnings growth, and the deep correction witnessed since October last year, the broader market is well-positioned to continue its upward trajectory unless fresh negative triggers emerge,” he noted.

The recovery, once narrowly led by select pockets like defence and NBFCs, has broadened to include a wider swathe of sectors such as metals, real estate, and automobiles. These rate-sensitive sectors have gained on the back of softening inflation and expectations of a rate cut in RBI's June 6 MPC meet. Analysts point to better-than-expected quarterly earnings, coupled with renewed buying by both domestic and foreign investors, as key drivers behind this broad-based resurgence.

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While foreign portfolio investors (FPIs) had been net sellers earlier in the year, their return in recent weeks has added further fuel to the rally. Initially driven by domestic institutions and retail players, the renewed FPI interest has strengthened conviction in the broader market’s direction.

"Investing in smallcaps—even at current levels—should be highly selective. The market is unlikely to spare poor stock selection,” he warned. Stocks with strong fundamentals and consistent earnings performance are likely to remain in favour and are playing their role in imparting resilience.

Looking ahead, analysts expect the relative outperformance of midcaps to persist, given the supportive technical setup and improving sentiment. For smallcaps too, the path higher remains but only for those with solid financials and sustainable growth stories.

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Interestingly, the Nifty Midcap 100 and Smallcap 100 indices have gained 6 percent and 8 percent, respectively, in May. The midcap index has not only recovered earlier losses but is now trading in the green for the year, while the smallcap index, though still down 5 percent year-to-date, has significantly narrowed its decline.

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