Smallcap & Midcap bloodbath: Why Nifty Midcap 100 fell over 11% from record highs

Small and midcap selling picks momentum

A quick look at the key indices reveal that the Nifty is down about 7% since early August, the Nifty Midcap 100 hit a record 64,451 on August 26 and closed Wednesday at 57,566, nearly 11% lower. Until late September, midcaps had fallen broadly in step with the large cap peers. That has now changed, since September 25, the Midcap 100 has lost another 5.5%, while the Nifty has slipped just 1.4%.

Why has the small and midcaps selling gained traction, and why are they falling more than their large cap peers? . Tanvi Kanchan, Associate Director, Anand Rathi Share and Stock Brokers, explained that “the valuation gap is finally narrowing, though it is still wide. To be fair to midcaps, this is not bubble territory by their own recent standards; at about 27 times, the Midcap 100 is some 9% below its five-year median of 29.7 and well below its one-year median of 31.6. Midcap earnings grew 23% in the June quarter, an 11-quarter high, but large cap earnings grew 21% in the same quarter.”

Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan added that “The correction has moderated valuations across both segments, but the impact is not uniform. Within the midcap space, there is a wide variation in valuations, and companies with strong earnings visibility, healthy balance sheets and sustainable growth can continue to command a premium. At the same time, stocks where valuations are not supported by earnings growth could see further pressure.”

Big fall in small and midcaps: Key triggers

As per market observers, there are various factors contributing to the big correct in the small and midcap space.

#1 Earnings Performance

The overall earnings performance and the big divergence between small and midcaps is seen as one of the primary factors driving investor sentiment at the moment. Anand Rathi’s Tanvi Kanchan explained that “on a 12-month forward basis, the Nifty trades about 18% below its long-period average, and Nifty profits grew 18% in the June quarter, a 10-quarter high, even with the oil marketing companies dragging. That growth is concentrated, though, with five stocks accounting for 60% of the incremental earnings.”

#2 FII selloff impacting sentiment

According to Kanchan, the big FII selling is also weighing on sentiment. “FPIs have pulled out more than Rs 3.1 lakh crore out of Indian equities in 2026, nearly double last year’s full-year outflow, and their ownership is at a 17-year low. Large caps are where foreign investors sit, so they have taken the brunt of the selling.”

She added that, “new supply has made it worse; public equity fundraising hit a record Rs 2.43 lakh crore in the first half of FY27, soaking up money that would otherwise have gone into existing stocks. On top of that, Brent crude is above $110 on US-Iran tensions, higher oil squeezes margins, and smaller companies with less pricing power tend to feel it first.”

Better earnings visibility in the large cap space

Most experts believe that the large caps currently offer greater earnings visibility in several sectors while the midcap segment continues to provide opportunities across businesses with higher growth potential. “Therefore, the focus should remain on earnings growth, valuation comfort and business quality rather than market-cap classification alone. With markets remaining volatile, investors should evaluate stocks selectively and avoid paying excessive premiums for growth. A staggered approach can help investors manage volatility while building exposure to fundamentally strong businesses.”

Manish Sonthalia, Director and CIO of Emkay Investment Managers added that “I think as long as Banks /IT/FMCG which comprises roughly 50% of the weightage of Nifty 50, it is headwinded. High-growth sectors are majorly represented in small and midcaps, and I think they would tend to do better. It’s the law of small numbers and the longevity of visible growth here which is contributing to a better visible upside than the incumbent large/mega cap stocks represented in Nifty 50.”

What’s the big worry now

According to leading market observers, the sharp correction in the broader market, particularly in small caps, might continue since their valuations are driven up by liquidity rather than fundamentals. They believe that fairly valued large caps could “present value buying opportunities for patient investors,” as per Dr V K Vijayakumar, Chief Investment Strategist, Geojit Investments.