[ad_1]
The benchmark Sensex has surged about 8% in the first half of 2025, showcasing remarkable largecap resilience that has propelled Indian equities toward potential new peaks. But beneath this headline-grabbing performance lies a tale of two markets: while bluechip giants have dominated, the BSE Smallcap index remains stubbornly down 1.7% year-to-date and midcaps have barely managed to stay flat.
Now, with momentum shifting dramatically in recent months, market veterans are asking the burning question: Could the second half belong to the smallcap universe?
The most aggressive bulls are already sketching out a path to historic highs. Karthick Jonagadla, Founder & CEO at Quantace Research, has set jaw-dropping December-end targets that would shatter all previous records.
“We peg December-end targets of Nifty 26,500 and Sensex ~95,000, implying mid- to high-single-digit upside from current levels and new peaks well before calendar year-end,” Jonagadla declared, backing his bold prediction with three powerful catalysts.
His confidence stems from the RBI’s aggressive monetary easing. The RBI’s front-loaded 50 bps cut in June takes the repo rate to 5.50% and signals a neutral stance, combined with record-breaking retail flows where SIP contributions hit another record Rs 26,688 crore in May and have stayed above Rs 20,000 crore for ten straight months.Also Read | Rs 1 lakh crore selloff tsunami threatens Nifty rally as promoters, strategic investors exit
The foreign money is flowing back too: “Foreign investors returned with about $5.5 billion of block-trade buying in May alone.” FIIs have been net buyers in all the last 4 months.
The real story lies in the dramatic smallcap turnaround that’s reshaping market dynamics. After months of brutal punishment, smaller companies have staged what can only be described as a spectacular comeback.
“Smallcaps have staged a strong comeback. The BSE Smallcap index rose more than 20 percent in the second quarter. Midcaps also recovered. Momentum is building in the broader market, driven by improving fundamentals and stronger flows,” Krishna Appala, Fund Manager at Capitalmind PMS said, highlighting the explosive reversal that caught many by surprise.
Jonagadla sees this as just the beginning: “Three forces should keep that tailwind alive in H2. Liquidity is turning supportive. Policy rates are falling just as earnings momentum broadens. Valuations have cooled.”
The technical picture has improved dramatically: “After the Q1 sell-off, the Nifty Smallcap 250 now trades a little below its 5-year median PE; profit-taking in June shows froth has come out of the trade.”
Most importantly, the earnings outlook remains robust: “Consensus still sees mid- and small-cap EPS growing in the high-teens for FY26.”
Also Read | Nifty breaks out of 31-day consolidation cage. Will stock market hit record high this week?
The Great Smallcap Debate
But not everyone is convinced the small-cap revival will sustain. Amit Jain, Co-Founder of Ashika Global Family Office Services, remains deeply cautious about the broader market surge.
“Despite the recent bounce, we remain cautious on the smallcap and midcap space heading into H2,” Jain warned. “This rebound has been driven more by liquidity than fundamentals. Valuations in many pockets remain stretched, and earnings upgrades have not kept pace with price action.”
His concerns run deeper than valuation: “Moreover, broader market participation is thinning, and concentration risk is high. The rally has largely bypassed companies with weak balance sheets or inconsistent cash flows, which still make up a large portion of the smallcap universe.”
The warning is stark: “Unless earnings catch up meaningfully or we see strong policy tailwinds, the risk-reward for fresh entry into this segment looks limited.”
Sector Sweet Spots for the Second Half
As markets gear up for the next phase, clear sector winners are emerging from the pack.
Financials are leading the charge. “Lower policy rates and relaxed provisioning norms boost credit growth; PFC and REC leapt ~4% when the RBI’s new rules landed, and PSU-bank indices hit six-month highs,” Jonagadla noted.
Appala concurs: “Lower interest rates are helping banks and NBFCs. Credit growth remains strong, and asset quality is stable.”
Capital goods and infrastructure companies are riding a government spending wave. “Order books are overflowing—L&T reported a record ₹1 trillion intake in Q4 FY25—underpinned by ongoing central and state capex,” Jonagadla said.
The consumption revival is also gaining steam. “Rural demand is improving, and urban consumption is steady. FMCG, two-wheelers, and discretionary segments are showing healthy trends,” Appala explained, pointing to improving “sales of two-wheelers, tractors, and FMCG products.”
However, selectivity will be key. “Export-oriented pharma and chemicals could lag amid U.S. tariff noise, and defensives look fully valued,” Jonagadla cautioned.
The Second Half Playbook
Despite geopolitical tensions that continue to inject volatility into global markets, Indian benchmarks remain “relatively resilient,” according to Jain, who sees potential for “further upside toward 26,500–27,000 in the coming months.”
For small and midcap investors specifically, Jonagadla offers measured optimism: “H2 should show better absolute returns than H1, yet dispersion will stay wide, rewarding bottom-up quality screens.”
Appala’s roadmap is clear: “There are good reasons to believe so. Inflation has cooled, the RBI has started cutting rates, and rural demand is recovering. These tailwinds support a more positive setup for smaller companies. However, valuations in this space remain expensive. Stock selection will be important.”
His final advice captures the moment perfectly: “The first half of the year was largely driven by large-cap resilience. But the broader market is now gaining traction. With improving macros, better earnings, and steady inflows, the second half could offer opportunities — especially in sectors linked to India’s growth story.”
The stage is set for a potential small-cap boom—but as always in markets, the devil will be in the details.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
[ad_2]
Source link