Mid, smallcap indices can dip up to 9% from here; analysts turn cautious

The rally in the small-and midcap indices (SMIDs) is showing signs of fatigue amid a sharp rebound from April lows in the backdrop of tepid earnings growth and high valuations, suggest analysts. These indices, technical charts hint, may drop up to 9 per cent from the current levels.

 

Nifty/SMIDs have bounced 12 per cent / 20 per cent from April low amid earnings downgrades and continuing economic slowdown. This, said analysts at Nuvama Institutional Equities, has led to an unprecedented wedge between growth and valuation—with the BSE 500 median PE at 40x, while trailing median earnings growth is just 9 per cent.  

 

“This is unsustainable and skews the buyer-seller incentive structure decisively in the latter’s favour. Insiders (promoters/private equity players) are on a selling spree, whereas domestic flows are slowing. Caution is particularly warranted in SMIDs given their larger valuation-earnings wedge,” wrote Prateek Parekh and Tanisha Gupta of Nuvama Institutional Equities in a recent note.

 

Historically, the combination of narrowing earnings differential, high valuations and prolonged outperformance, Nuvama said, has led to a large period of underperformance for SMIDs (2018–19).  

Smallcap, midcap performance

 

However, it has been five years since SMIDs have not corrected by over 5 per cent YoY, the report highlights, which is one of the longest periods of such outperformance for these two indices.

 

FII selling

 

Foreign institutional investor (FII) selling is another cause for concern, says G Chokkalingam, founder and head of research at Equinomics Research. 

 

“While FIIs are selling Indian equities, many overvalued SMID stocks that have high FII exposure are correcting substantially. This possibly indicates that FIIs are booking profits in overvalued stocks. Hence, one needs to be cautious on overvalued stocks, especially in the SMID segment,” he said.  

 

As a strategy, Nuvama remains cautious on stocks such as Sobha Ltd, Motilal Oswal Financial Services, Nippon Life India Asset, Supreme Industries, Angel One, Devyani International, Trident, Birlasoft, Cyient where counters have rallied despite one-year forward earnings per share (EPS) change is negative and valuations are at more than a 10 per cent premium to its 10-year average.

 

Technical indicators

 

At the bourses, meanwhile, the NSE Nifty 50 index has shed 4.2 per cent from its recent high of 25,669 hit on June 30, 2025. 

 

The broader Nifty MidCap 150 and the SmallCap 250 indices, on the other hand, have dropped 3.7 per cent and 5.6 per cent, from their respective highs of 22,070 and 18,077 registered on July 17, 2025.

 

Going ahead, MidCap and the SmallCap indices look vulnerable for deeper cuts and could fall another 7 per cent and 9 per cent respectively, technical charts hint. The Nifty 50 index is likely to relatively perform better with a possible fall of around 5 per cent from the current levels, as per technical charts. 

 

The bias for Nifty, Nifty MidCap and Nifty SmallCap is likely to remain negative as long as these indices quote below 25,330, 22,050 and 17,800 levels, respectively. The key interim support levels for these three indices are placed at 24,200, 20,620 and 16,800 levels, show charts.

 

“For day traders, buying on intraday dips and selling on ups would be the ideal strategy. However, if the market dips below 24,600/80,600, the sentiment might change. Below these levels, traders might prefer to exit their long positions,” advises Shrikant Chouhan, head equity research at Kotak Securities.