Will mid-caps and small-caps take a breather in 2025? Experts weigh in
Mid-cap and small-cap stocks, historically favoured for high returns, have declined over 2% in January 2025. Despite past strong performance, analysts warn of potential headwinds like regulatory scrutiny and slower earnings growth, suggesting a cautious investment approach focused on quality stocks.
Mid-cap and small-cap stocks have been a favourite among investors due to their high return potential. However, the start of 2025 has presented a contrasting narrative for the broader markets. Both the Nifty Midcap and Smallcap indices have seen a decline of over 2 per cent each during the first six sessions of January, compared to a relatively modest 0.2 per cent drop in the benchmark Nifty 50 index.
Despite the sluggish beginning, the past year has been a testament to the resilience of mid-cap and small-cap indices, as both outperformed the benchmark Nifty. Over the last 12 months, the Nifty Midcap and Smallcap indices posted impressive gains of over 25 per cent each, dwarfing the Nifty's 9.6 per cent rise. However, with analysts signalling caution, the question remains: will mid and small-caps continue to shine, or are they poised for a period of consolidation in 2025?
Performance Highlights and Current Challenges
The strong performance of mid-cap and small-cap stocks in recent years has been driven by factors such as robust earnings growth and increased investor interest.
For instance, in 2024, the Nifty Midcap 100 and Nifty Smallcap 100 indices delivered gains of 28 per cent and 29 per cent, respectively, far outpacing the Nifty 50's 13 per cent increase. The preceding year, 2023, witnessed even more striking returns, with mid-cap and small-cap indices rising by 32 per cent and 35 per cent, respectively, compared to the Nifty's 18 per cent uptick.
However, the tide may be turning. Analysts are pointing to several headwinds for mid and small-cap stocks in 2025, including heightened regulatory scrutiny, tighter monetary policies, and a potential slowdown in earnings growth. These factors could limit the ability of these segments to outperform as they have in the past, they believe.
Broader market outlook
Trivesh D, COO, Tradejini said the mid-cap and small-cap stocks have been a key driver of market performance in recent years. However, he warns of a potential shift in dynamics for 2025.
"With increased regulatory scrutiny and slower earnings growth, mid and small caps may underperform or, at best, match the broader market indices this year. Investors should exercise caution and focus on quality stocks with strong fundamentals," he advises.
Dr. Ravi Singh, SVP- Retail Research, Religare Broking also shared a cautious outlook for the near term. He expects market conditions to remain subdued until mid-January, with positive momentum potentially emerging closer to the Union Budget announcement. "After January 15, mid-cap and small-cap stocks could see some outperformance, but significant gains are unlikely before this period," he remarks.
Neeraj Chadawar, Head - Fundamental and Quantitative Research, Axis Securities experts the first half of the year to be more volatile, with returns becoming backloaded in the latter half of the year.
"The first half of 2025 is likely to be more volatile. Consolidation in the market appears inevitable in the near term, and the breadth of the market may narrow further," he explained.
Against this backdrop, he emphasised the importance of identifying companies with sustainable business models, strong earnings growth, and credible management.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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