Mid-cap stocks to perform better in short-to-medium term; Geojit's Vinod Nair explains why

As we step into the new Samvat 2082, the view has become more vibrant, with the market expected to reach a new high. This is after the muted last year, impacted by the weight of high inflation and low business growth led by external headwinds like economic slowdown, geopolitical risk and tariffs. This time, the wave is different from low inflation, government reforms, RBI liquidity measures and a possible India-US deal.

The Confederation of All India Traders (CAIT) reported that Diwali 2025 sales hit a record ₹6.05 lakh crore, a 25% increase over the previous year. RBI has upgraded FY26 real GDP growth from 6.5% to 6.8%, and based on the initial data like auto sales, there are possibilities of further upside in the FY26 and FY27 forecasts.

Tata Motors announced it delivered over 1 lakh vehicles in the 30-day festive period between Navratri and Diwali, a 33% growth year-over-year. CAIT’s surveys indicated rising consumer and trader confidence, suggesting that robust consumption is likely to continue beyond the festive season, potentially making H2 FY26 stronger than earlier expected. Encouragingly, nearly 80% of goods sold were Made in India, reflecting the success of Atmanirbhar Bharat and the growing emphasis on domestic manufacturing.

Q2 Results Growth

The Q2 earnings so far indicate a healthy low double-digit growth of around 9–11%. The initial business data and management narrative suggest that corporate earnings can improve further in Q3 and Q4. Credit growth of scheduled commercial banks (SCBs) picked up, with credit growth outpacing deposit growth during the fortnight ended October 3, 2025, to 11.4% from 9% during May. And moving ahead, the RBI’s intention to push domestic liquidity with measures like reducing the risk weight of NBFC assets and adding more leeway between the functioning of Banks and NBFCs is indicative of better corporate earnings in the future, a precursor to boosting corporates confidence and the return of FIIs.

FIIs, which have offloaded over ₹2.5 lakh crore in the past 12 months, redirecting funds toward markets with lower valuations, opportunities in AI and semiconductors, and trade-linked advantages, are bound to change in the future. Plausibility is arising that FII outflows could ease and turn positive, as the premium valuation of India has reduced to below the 5-year average of 75% and earnings are expected to rebound from Q3 onwards.

The MSCI India premium to MSCI EM has reduced to 66% from 90% one year back, based on a one-year forward P/E basis. India’s broad market earnings growth, which was about 10% in H1, is likely to breach 14-15% in H2, as per initial estimates. Indicatively, FIIs' net inflows in October have been supportive, with ₹12,000 crore compared to net outflows of ₹81,000 crore over the prior three months.

Stock Market Outlook

Secondly, as the broader market earnings view is better, midcaps would benefit from an upgrade in outlook. In H1, large-cap earnings growth of Nifty 50 was sub 7-8%, while the broad market was 10-12%. Indicative of better results by Midcaps. This view can generate a better performance for the mid-caps in the short to medium term.

Why mid-cap stocks are expected to give better returns

Due to the upgrade in earnings forecast and muted price performance YTD, the premium valuation of midcaps has reduced to 35% from 50% a year before. However, the overall valuation of midcaps continues to trade on the higher side compared to the 10-year average of 21%, which we expect to continue to trade in the premium due to a better earnings outlook.

The market has started well this week due to strong consumer demand and in expectation of the US deal. However, Trump’s comment about the reduction in Russian oil imports by India, the cancellation of the Modi-Trump meeting at the 47th ASEAN summit and the US sanctions on Russia have twisted the momentum.

Sanctions have started to affect the crude prices, up $4-5 this week. If it affects the availability of crude in the world market, it will be negative for India, which was a big fiscal beneficiary as crude prices stayed low. A muted trend may persist as India secures the availability, this time making it from diverse sources and at a good price.

The author, Vinod Nair, is Head of Research at Geojit Financial Services.

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.