Midcap, Smallcap Stocks Underperform Sensex in 2025
Smaller stocks have significantly underperformed larger counterparts in 2025. The BSE smallcap index declined 6.68%, while the midcap index gained only 0.77%, compared to the BSE Sensex's 9.30% jump. This underperformance is attributed to elevated valuations, profit-booking pressures, global uncertainties favoring blue-chip stocks, and sensitivity to funding costs. The trend contrasts with the strong performance of small and midcap stocks in previous years. Despite current challenges, experts maintain a cautiously optimistic outlook for smaller stocks, citing potential opportunities as valuations cool and earnings visibility improves.
*this image is generated using AI for illustrative purposes only.
Smaller stocks have significantly underperformed their larger counterparts in 2025, with elevated valuations and profit-booking pressures weighing on investor sentiment. Market analysts attributed this divergence to a natural correction following exceptional outperformance in the previous two years, combined with global uncertainties that favored blue-chip stocks.
Market Performance Comparison
The performance gap between different market segments has been stark in 2025. Till December 24, the BSE smallcap index declined by 6.68%, while the midcap gauge managed only a marginal gain of 0.77%. This contrasted sharply with the 30-share BSE Sensex, which jumped 9.30% during the same period.
| Index | Percentage Change |
|---|---|
| BSE Sensex | +9.30% |
| BSE Midcap | +0.77% |
| BSE Smallcap | -6.68% |
Factors Behind Underperformance
Several key factors contributed to the shift in investor preference:
- Valuation concerns: Elevated pricing levels in smaller stocks triggered profit-booking
- Global uncertainty: Investors shifted focus toward largecap stocks with stronger balance sheets
- Funding sensitivity: Smallcap and midcap companies faced higher volatility due to sensitivity to funding costs and margin pressures
- Currency depreciation: Rupee weakness amid US-India trade negotiation concerns
- Foreign outflows: Persistent FII selling pressure on broader market segments
Historical Performance Context
The recent underperformance stands in contrast to the rally witnessed in previous years. In 2023-24, the BSE smallcap index delivered returns of over 29%, while the midcap index gained 26%, outperforming the Sensex.
Market Dynamics and Investor Behavior
Market experts noted that when markets undergo time correction, as witnessed since September 2024, small and midcap stocks tend to underperform due to their higher beta and greater sensitivity to liquidity and risk appetite. The rupee depreciation, triggered by concerns around US-India trade negotiations and persistent FII outflows, led to a risk-off reaction in the broader market.
Future Outlook
Despite the current underperformance, market experts maintain a cautiously optimistic outlook for smaller stocks. As valuations cool and earnings visibility improves, selective opportunities may emerge, supported by India's GDP growth and domestic liquidity. After the 2025 correction, valuations in quality midcap stocks have become more reasonable compared to their peak levels, though broad-based rallies may remain unlikely unless earnings growth improves meaningfully.
Currency stability will be a key variable going forward. As the rupee stabilizes and gradually normalizes toward its historical Real Effective Exchange Rate averages, pressure on broader market valuations may ease, potentially allowing small and midcaps to recover and narrow the performance gap with largecaps.
Historical Stock Returns for BSE
| 1 Day | 5 Days | 1 Month | 6 Months | 1 Year | 5 Years |
|---|---|---|---|---|---|
| -0.82% | +0.70% | -5.47% | -4.90% | +45.83% | +3,769.41% |
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