Smallcap, midcap stocks lagged behind blue-chip peers in 2025

Smaller stocks lagged behind their bigger blue-chip peer Sensex this year as elevated valuations triggered profit-booking after a strong rally in the last two years. Analysts attributed the underperformance of smallcap and midcap indices in 2025 due to market normalisation after their exceptional outperformance in 2023 and 2024.

Depreciation of the rupee, concerns over the US–India trade negotiations and persistent foreign fund outflows also led to a sharp risk-off reaction in the broader market, experts noted. On the road ahead, market experts are of the view that the outlook for smallcap and midcap indices remains cautiously optimistic.

They said that as valuations cool and earnings visibility improves, selective opportunities should emerge, supported by India’s steady GDP growth and strong domestic liquidity. Till December 24 this year, the BSE midcap gauge went up marginally by 360.25 points or 0.77 per cent.

The BSE smallcap index, however, declined by 3,686.98 points or 6.68 per cent. In contrast, the 30-share BSE Sensex jumped 7,269.69 points or 9.30 per cent during the period under review.

“The underperformance of smallcap and midcap indices in 2025 is primarily a result of market normalisation after two years of exceptional outperformance. “In 2024, the BSE smallcap index delivered returns of over 29 per cent, while the midcap index gained 26 per cent, far outperforming the Sensex.

Such sharp rallies pushed valuations to elevated levels, especially in smaller companies where earnings growth did not keep pace with price appreciation,” Ponmudi R, CEO - Enrich Money, an online trading and wealth tech firm, said. In 2025, this imbalance began to correct, he said.

“Investors shifted focus toward largecap stocks with stronger balance sheets and stable earnings visibility amid global uncertainty. Smallcap and midcap companies, which are more sensitive to funding costs, margin pressures, and economic slowdowns, faced higher volatility.

As a result, capital rotated toward blue-chip stocks, leading to relative underperformance in the broader market segments,” Ponmudi said. According to market analysts, smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms.

N ArunaGiri, CEO, TrustLine Holdings, an Equity Research and Asset Management firm, said, when markets undergo a time correction, as they have since September 2024, it is well understood that small and midcap stocks tend to underperform.