Mid and Small Cap Indices Slide Over 20% From September 2024 Highs

Mid and small-cap stocks in the Indian stock market have declined significantly from their highs in September 2024. Both the mid-cap and small-cap indices have declined by over 20% in dollar terms.

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The BSE MidCap 150 Index is lower by about 22% from its peak in dollar terms. The BSE SmallCap 250 Index has declined more steeply, down roughly 30.4% over the same period. 

Measured in rupees, the fall is smaller but still notable, around 14% for mid-caps and about 22% for small-caps. Both indices had touched their highs in September 2024 before the slide began.

Valuations Adjust, But Not Evenly

Valuation trends across the two segments are moving in opposite directions. Mid-cap stocks are now trading at roughly 25 times one-year forward earnings, which is below their 10-year average of 27.3 times. 
Small-caps, however, continue to trade at higher levels than history suggests. The SmallCap 250 index is at about 22.2 times forward earnings, still above its long-term average of 20.9 times.

A Broad-Based Decline

The fall is not limited to a few stocks. It has been spread across the indices. In the SmallCap 250 index, nearly two-thirds of the stocks—about 66%—have lost their three-year CAGR returns.

Around half have also given up their five-year gains. Mid-caps show a similar, though slightly less severe, trend. Around 53% of stocks have lost their three-year gains, and around 37% have lost five-year gains.

Pressures Build Through 2024 And After

The correction has been accompanied by a period of high gains up until 2024, with mid and small-cap stocks continuing to attract buying interest.

Since then, a number of factors have been at play with the decline. These include the rise in crude oil prices, continued selling by FIIs, and the appreciation of the dollar. There has also been an increase in geopolitical tensions.

Participation Slows Down

There has also been a noticeable trend of reduced participation in these segments.

Activities of retail investors, high-net-worth individuals, and proprietary desks have decreased in recent times in comparison to the earlier stages. In fact, there has been a reduction in prices in the recent past, and this has caused a reduction in positions.

The recent levels indicate that a large part of the gains accumulated in the 2024 rally have reversed in mid and small-cap stocks.