Mid, smallcap outlook: Why CY26 will reward quality over exuberance

In the calendar year 2026, the Indian equity markets have become a tale of two halves. While the benchmark Nifty 50 has grappled with global headwinds such as the US-Iran war, plunging 8.85 per cent year-to-date (YTD), the broader markets have shown surprising strength. Despite the volatility sparked by the ongoing US-Iran conflict and persistent geopolitical uncertainty, the Nifty Midcap 100 and Smallcap 100 indices have remained in the green, gaining 1.28 per cent and 4.58 per cent on a YTD basis, respectively, as of May 11, 2026.

 

Analysts suggest that the primary factor behind this outperformance remains a superior earnings trajectory. The Q4FY26 earnings season indicated that the fundamental outlook for the SMID space remains resilient despite the war-led correction. Analysts point out that several mid and small businesses continue to deliver stronger growth relative to larger peers, with profitability exceeding expectations in industrials and financials.

 

According to a report by Motilal Oswal Financial Services (MOFSL), midcap companies within their universe delivered a 29 per cent year-on-year (Y-o-Y) earnings growth, significantly higher than the estimated 22 per cent. On the contrary, large caps posted a more modest 14 per cent growth. 

 

Multiple sectors, including BFSI, Technology, Utilities, Real Estate, and oil and gas, boosted midcap performance, contributing approximately 87 per cent of the incremental year-over-year earnings growth. While small-caps delivered an in-line performance with 30 per cent earnings growth, 70 per cent of the coverage universe met or exceeded estimates, the brokerage said in its note. 

 

Sunny Agrawal, head of fundamental research at SBI Securities, attributed this performance purely to the "future winners" residing in the broader market. "The outperformance of mid and smallcaps over largecaps is purely led by earnings. The SMID pack has been delivering more than 15-20 per cent Y-o-Y earnings growth, whereas large-cap peers are seeing growth in the low double digits," he noted. 

 

Agrawal added that alpha generation has become tougher in large-cap indices due to their heavy skew toward the banking and IT sectors.

 

Notably, the market recovery following recent geopolitical tensions has highlighted this relative strength. Since the initial war-led correction, several SMID indices have not only recovered losses but moved above their pre-war levels, supported by strong domestic participation. In contrast, large-caps continue to trade below earlier highs, indicating stronger risk appetite and earnings confidence in selective SMID businesses.

 

Anil Rego, founder and fund manager at Right Horizons PMS, believes the outlook for SMIDs appears constructive, although returns are likely to be more earnings-driven rather than purely liquidity-led.

 

While previous years saw valuation excesses, the subsequent corrections have helped normalise multiples to more reasonable levels.

 

According to Rego, this creates opportunities for investors willing to focus on fundamentally strong businesses with scalable models, healthy balance sheets, and visible earnings growth.

 

"Government-led infrastructure spending, manufacturing expansion, improving domestic demand, and rising formalisation of the economy continue to create a favourable backdrop for emerging businesses. In addition, sectors linked to capital expenditure, import substitution, energy transition, defence manufacturing, and consumption are likely to remain key beneficiaries over the coming years," he said.

 

However, he noted that global uncertainties, commodity price volatility, geopolitical developments, and fluctuations in foreign flows could lead to intermittent market corrections and sharper stock-specific reactions. 

 

As a result, the market is likely to reward companies that can consistently deliver earnings visibility and execution, while weaker businesses may struggle to sustain valuations. Overall, the SMID segment continues to offer attractive long-term opportunities.