60% of Top 1,000 Stocks in Red: Smallcaps Lead 2025's Hidden Market Pain

Major indices such as Sensex and Nifty 50 have reached close to all-time highs, with the Sensex now only down 0.9% from the intraday peak it reached in December and the Nifty down just 0.7% from where it traded at its high. In contrast, the broader market is extremely weak, with nearly 60% (595) of the largest 1,000 stocks listed on Indian stock exchanges currently posting negative returns, with many down as much as 70%.

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Dissonance due to the Volatility of Smallcap Stocks

The vast majority of the loss in value took place during a massive small-cap stock market correction. While the large-cap stocks are continuing to perform, the Nifty Midcap 100 is off 1.4% from its peak, and the Nifty Smallcap 100 is significantly further behind than that, down by a staggering 10.2%. 

Changes in Institutional Capital and F&O Trading

The increasing popularity of buying and selling futures and options (F&O) encourages the use of leveraged strategies. As a result, there is a significant amount of selling pressure created on under-performing stocks; however, this same leverage factor can amplify declines on weaker performers. According to the most recent data available, F&O trading has been coming in at or near record highs and drawing speculative investment out of cash equities into F&O.

Expert Verdict: Earnings Key to Broad Rally

It is very important to have earnings rebounds and improved quarterly results for a sustainable and broad-based uptrend. Weak corporate profits and high valuations (small caps 30-40x earnings in pockets), combined with global issues like U.S. tariffs, have hindered the momentum of companies below the top heavyweights.

History & Market Breadth Measurements

This is not an isolated event: Within the period from 2021-22, the patterns will be reflected in 2025. After the COVID undershooting of stocks, there were 70% or more of the Nifty 500 stocks that underperformed. The current breadth measurements, as represented by small-cap advance-decline ratios of less than 0.4, indicate fragility. The underperformance of the top 1,000 is 60% vs. 45% in 2024, signalling a decrease in participation.

Impact for Investors

Less risk for portfolio diversification; however, for small and midcap tilters, the gains of largecap stocks were preserved, while many small and midcap stocks suffered losses of 15-20%. Earnings season is around the corner (beginning in January) and is even more critical as consensus estimates of EPS growth range from 12-15%, and a miss would magnify the decline. Strategic advisors recommend filtering for quality (earning rates greater than 15% and debt equity ratios of less than 0.5) and are awaiting the effects of the RBI's upcoming announcement of rate cuts. Long term, this disparity in participation will lead to a reset in sentiment, but the current record SIP inflows (₹4.9T) can help counterbalance that.