From 93% Gains to 7-Year Low: Will India’s Small-Caps Suffer Even More in 2026?

Synopsis: India’s small-cap market saw its sharpest decline in seven years, falling 9.45% in 2025 after strong gains in earlier years. The downturn was driven by weaker-than-expected earnings, stretched valuations, and investors moving liquidity toward safer large-cap stocks, creating worries about future performance.

India’s small-cap market has experienced its weakest performance in seven years, prompting a challenging question for investors: Should they adjust their expectations for 2026 as well?

The pressure is attributed to several factors, including earnings disappointments, high valuations, and a significant shift in liquidity towards large-cap stocks. In this article, let’s explore how 2026 will be worse for Investors.

Smallcap Index Faces Sharp Reversal in 2025

The BSE Smallcap index has experienced a major downturn in 2025, despite strong growth in previous years. After a 47.5% rise in 2023 and 29.3% in 2024, the index has fallen by 9.45% so far in 2025. 

This marks the worst performance since 2018, in which smallcaps lost more than 23%. The sharp drop follows a period of massive gains, 93% growth over 2023 and 2024, attracting a lot of retail investors and fund inflows.

Market Struggles: Significant Losses Across Sectors

The market-wide data for 2025 up until November reveals the extent of the damage, with thousands of companies facing significant declines. Around 1,000 listed companies have seen their stock prices drop by over 20% from their all-time highs. More troubling, 440 companies have fallen by more than 50%, and many others have lost as much as 90%. 

These steep declines aren’t limited to a few stocks but affect a wide range of sectors, including telecom, infrastructure, real estate, engineering, textiles, commodities, financials, media, IT services, pharma, defence, and renewables.

Stocks with a Massive Fall

Stocks such as GTL Infrastructure, Subex, Vakrangee, Filatex Fashions, Dish TV, Peninsula Land, Reliance Infra, Reliance Power, SEPC, Shankara Building Products, GVK Power, and others are down between 80% and 99% from their peaks.

Even though the Sensex has risen by around 10% in 2025, smallcaps are struggling. Institutional investors have been putting money into large-cap stocks, which have shown stable earnings and less volatility. Midcaps have seen a slight gain of about 2%, but smallcaps are facing a tough time with disappointing earnings and a correction of overvalued stocks.

Brokerage earnings reviews for the September quarter point to the key trigger

JM Financial 

They say about 32% of small-cap companies under its coverage missed expectations in Q2. The miss ratios were lower for midcaps and largecaps. Even within the Nifty50, where 40% of firms beat estimates, 28% still missed targets. Smallcaps, however, saw both weaker growth and more widespread disappointments.

Motilal Oswal

Motilal Oswal presented a sharper perspective, noting that smallcaps saw a 5% year-on-year decline in earnings for the quarter, falling short of the expected 3% growth. Nearly 40% of small-cap companies missed earnings estimates. This was particularly concerning for a segment that had outpaced fundamentals, leaving valuations exposed due to the lack of earnings support.

The recent correction can be seen as a valuation reset following nearly two years of excessive optimism. Domestic inflows into small-cap and mid-cap mutual funds led to a market imbalance, with prices rising as investors chased momentum. Many small-cap stocks were trading 25-35% above their long-term valuation averages, and earnings began to normalize; this excess had to be corrected.

Should investors forget about returns even in 2026?

Edelweiss AMC Analyst Trideep Bhattacharya said valuations are now closer to historical norms. Nifty valuations are near their 10-year average of about 20.5 times one-year forward earnings.

However, small-cap and mid-cap stocks are still trading at higher-than-usual levels, about 25.1 times and 29.2 times expected earnings, respectively, compared to their historical averages of 16.7 and 23.1 times.

Additionally, the market recovery in 2025 has been mainly driven by large-cap stocks, with smaller companies not participating much. The Nifty small-cap index is still 13% below its 2024 peak, and many small-cap stocks are trading more than 50% below their highs. For a broader market recovery, analysts believe either earnings need to pick up significantly or stock prices need to drop further, but neither outcome is certain.

Kotak AMC’s Harsha Upadhyaya said the segment is under pressure from both sides. If valuations need further adjustment, small-cap stocks could experience greater volatility. Should earnings be the main driver for recovery, it may take some time. According to him, neither of these conditions seems to be in place at the moment.

Retail investors have been hit hardest, owning approximately 8.6% of NSE-listed companies and contributing to about 35% of cash-market activity. Their portfolios are heavily weighted in small-cap stocks, and liquidity issues in these stocks only worsen their losses.

Written by Sridhar J

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