Mid-, small-cap stocks take a breather—is this the perfect time to buy?

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Subscribe to enjoy similar stories. The Indian stock market hit new highs on Friday, driven by the US Federal Reserve’s decision to cut interest rates. This fuelled optimism in the market, with both the frontline indices Nifty 50 and Sensex recording healthy gains.

While the market basks in the glow of record highs, undercurrents of unease ripple through the broader landscape, especially among mid- and small-cap stocks. There is a notable divergence in market performance. In the last one month, the Sensex rose 4.6%, the index of top 500 firms gained 3.8%, while the mid- and small-cap index increased 2.2%, and 4.1%, respectively.

However, over the past six months, the mid-cap segment and small-cap segment had outperformed the blue-chip indices. The disparity grew stronger as only 24% of the top 500 stocks have fallen 20% or more compared to their one-year highs but in the small-cap counters 37% stocks are trading at significant discounts to their 52-week peak while in the mid-cap space this share was just 20%. Moreover, half of all BSE-listed stocks have dropped 20% or more from their yearly highs, showed a Mint analysis.

“Historically, large-caps take the lead, followed by mid-caps and small-caps. However, when the economy grows rapidly, small-caps tend to outperform with better earnings growth. With interest rates expected to decrease, this should benefit small- and mid-caps' earnings growth going forward, assuming the economy maintains its 7%+ growth rate," Andrew Holland, CEO, Avendus Capital Alternate Strategies.