Smallcap and midcap stocks, which were the top performers in 2024 are facing strong selling pressure this year. The Nifty Smallcap 250 index clocked an impressive 25% return in 2024 in comparison to 9% return from Nifty50 in the same period. On similar lines, Nifty Midcap 150 zoomed 23% last year. However, the rally in midcaps and smallcaps came to a halt this year with FIIs moving out of India, US President Donald Trump imposing tariffs, lacklustre Q3 earnings season and moderate economic growth.
On the fundamental front, midcaps and smallcaps have astronomical valuations which is among the main factors behind the meltdown in these stocks.
Recently, Sankaran Naren, CIO of ICICI Prudential Mutual Fund cautioned investors saying that the median P/E ratio for mid-and small-cap stocks has soared to 43x, a level he considers 'absurd' and unsustainable.
Nifty Smallcap 250 index is down 18.31% this year with a majority of losses (9.57%) coming in the last one week.
In comparison, Nifty Midcap 150 fell 13.22% in 2025. It slipped 7.43% in the last one week.
In the last trading session on February 14, the small cap 100 index closed ended 21.6% below its record all time high reached on December 11, breaching the 20% limit that is widely considered to confirm a security ha entered in a bear market.
On the other hand, mid-cap 100 index stood 18.4% lower than its closing high on September 24.
Investors would be guessing is the correction over or is there more carnage left in midcap and small cap counters.
Time may not be right to enter these stocks, signals a recent report by Motilal Oswal.
The small-cap index is trading at a forward 12-month price-to-earnings (PE) ratio of 24.5x, well above its 10-year average of 16x, said the brokerage.
The mid-cap index's PE ratio of 35.8x is way higher than its its 10-year average of 22.4x.
However, Nifty 50 trades at a PE ratio of 19.9x, marginally below its 10-year average of 20.6x.
Shridatta Bhandwaldar, Head - Equities at Canara Robeco Mutual Fund said, "Large-cap valuations have corrected to fair levels, trading at around 18.5x FY27 earnings, while mid-and small-caps remain 15-20% above historical averages. We believe the broader market may see a time correction over the next few quarters. Given the current market dynamics, we have moderated our cautious stance. For investors with a one-to-two-year horizon, large caps offer fair valuations, while mid- and small-caps require a longer-term view."