Mid- and small-cap stocks have borne the brunt of the market correction in the last 12 months, witnessing deeper drawdowns and far greater volatility compared to their large-cap peers, a Mint analysis shows.

Within the Nifty 50 stocks, 16 are trading 15% to 33% below their 52-week highs. In contrast, the broader Nifty 500 shows deeper corrections, with 34 stocks down 40-75% from 52-week peaks and another 203 stocks trading 20-39% below.

The disproportionate correction in the SMID segment, as small and mid-cap stocks are referred to, is not as much linked to earnings, an expert said. “The bigger reason here is liquidity rather than earnings growth momentum,” said Vinay Jaising, chief investment officer and head of equity advisory at ASK Private Wealth.

This trend is despite foreign institutional investors owning a smaller percentage in SMID stocks, said Jaising. While FIIs owned around 18% in NSE 500, their ownership in large caps was higher at 22%; it was around 16% in mid-caps and some 14% in small caps. In the Nifty Microcap 250, the holding was even lower at around 8%.

With the outflow of almost $24 billion from January 2025, the pressure on small caps was higher, as their liquidity on the bourses is significantly lower than mid-caps, which, in turn, is lower than that of large caps. Even a relatively small sale in an SMID stock would would put pressure on its price, he added.

Over the past year, the Nifty 50 has delivered about 13% returns, while the Nifty Midcap 100 has gained over 17% and the Nifty Smallcap 250 is up more than 10%.

Earnings growth back but…

The drag on SMIDs is likely to continue even after growth has returned in earnings after a full year of profit contractions.

In the December quarter, Jaisingh pointed out, NSE 500 witnessed a sales, Ebitda, profit after tax growth of almost 10%, 13%, and 11%, respectively. “PAT growth for large cap was 12%, mid cap was 16%, and small cap was an impressive 25%… excluding oil and gas space, it was still healthy at 16%,” he said.

Shreyash Devalkar, head of equity at Axis Mutual Fund, noted that large-caps offer relatively modest growth and trade at reasonable valuations, while mid- and small-caps have also corrected.

The Nifty 50 is currently at 17.56 times one-year forward earnings, a sharp discount to its five-year average of 23.8 times and is just 2.7% below its lifetime high, Bloomberg data showed.

In the broader market, valuations have also cooled but are still relatively high. The Nifty Midcap 100 trades at 22.89 times FY27 earnings versus a long-term average of 35.5 times, while the Nifty Smallcap 250 stands at 20.74 times compared with its historical average of 28.1 times.

The Nifty Midcap 100 is 3.8% below its all-time high and Nifty Smallcap 250 13.7% off.

Why the underperformance?

Small- and micro-cap stocks had a dream run during and after Covid.

Between March, 2020 and September, 2024 period, Nifty 250 Small cap index was up over 550% vs Nifty 50 returns of over 260%, whereas the microcap stocks witnessed even sharper run-up, highlighted Nitin Jain, vice-president of equity at UTI AMC.

Earnings in recent years were buoyed by post-Covid demand revival, strong government-led capex, healthy exports, benign input costs and operating leverage, which together drove a valuation re-rating. Moreover, a prolonged stretch of positive-returns fuelled euphoria, setting off a cycle of rising retail participation, both direct and through funds, he said.

But, in 2024-25, many of these tailwinds turned into headwinds. Jain explained that geopolitical tensions and trade barriers hurt exports, capex slowed amid fiscal consolidation, higher rates weighed on valuations, and nominal GDP growth moderated. This led to a sharp earnings slowdown, especially in small and micro-caps, along with a reversion of valuation means.

Meanwhile, Vipul Bhowar, senior director and head of equities at Waterfield Advisors, added that during late 2024 and throughout 2025, the valuations of mid- and small-cap companies reached levels that were difficult to justify by historical standards. Many businesses were ‘priced for perfection’, meaning that even minor earnings misses or slightly cautious comments from management often led to significant selloffs, he said.

Retail participation surged during this phase, with many investors chasing strong 2023-24-style returns in small-caps. When these stocks started falling in early 2025-26, panic selling set in, and given their lower liquidity, the declines became more pronounced.

Fast forward to now, Bhowar noted that amid rising global tensions, including the recent US-Iran friction, and currency volatility, with the rupee touching 92 per dollar, domestic institutions are trimming exposure to risky small-caps and shifting toward safer blue-chip names in the Nifty 50.

Long term rebound but SIPs better

Is the earnings pain deeper beyond largecaps?

According to Jain of UTI AMC, over the last five-six quarters, earnings disappointment in the broader market has been more pronounced than the large-cap names.

“Smaller companies generally tend to have high cyclicality and high operating leverage. Revenue slowdown hurts them badly at the PAT level. Many of these companies had a high margin base for year-on-year comparison in FY25. Margin normalisation process has hurt the earnings growth in the recent quarters.”

Over the long term, small-caps are expected to outpace large-caps in earnings growth as recent reforms, including tweaks in goods and services tax, income tax cuts, lower interest rates, a sustained manufacturing push, and ongoing trade pact discussions, have created a supportive backdrop for growth revival, said market participants.

However, given high external volatility and their high return potential, systematic investment plans remain the preferred route for small-cap exposure, while lump-sum investments are better suited to hybrid and large-cap funds, they added.