Indian equities see bloodbath; small and midcaps take heavy hit | Stock Market News

Mumbai: Fears over fewer rate cuts in the US and a greenback gathering steam sent shockwaves over the Street on Monday, making investors poorer by more than ₹12 trillion overnight.

The carnage did not spare any corner of the market – While the Nifty and Sensex plunged 1.5% and 1.4% to close at seven-month lows of 23,085.95 and 76,330.01 points, the broader market fared worse, with Nifty’s mid-cap and small-cap indices plunging 4% each to hit seven-month lows of 52390.4 and 16159.9 points.

The rupee wasn’t spared either, slipping below the 86-mark for the first time. The local currency lost 0.7% or 56 paise—its single-biggest decline in two years—to close at a record low of 86.57 to the dollar.

Also read | Weak rupee dented dollar returns for already wary foreign investors in 2024

Weak corporate earnings could make matters worse.

“The market in 2025 will be a story of two halves”, said Ashish Gupta, chief investment officer of Axis Mutual Fund, with the first half more challenging due to an earnings slowdown. “It is likely that earnings growth will only be about 5%, and multiple sectors, such as auto, banks and cement will be affected. If you look at the global commodity sector like oil, gas, and metals, all these will be reporting flat to negative earnings growth. So, while valuations of many of these sectors, particularly financials, are quite attractive, we will not have earnings growth supporting them”.

The stronger dollar has impacted global fund flows, and these headwinds may play out only by the second half of 2025, Gupta added. Provisional data showed that foreign institutional investors net sold stocks worth ₹4,893 crore on Monday, while domestic institutional investors net bought ₹8,066 crore.

The markets took the heat of unexpectedly strong US jobs data, which led investors to price in just one US rate cut of 25 basis points in 2025. That lifted 10-year US Treasury yields to 14-month highs and sent the dollar rallying, making emerging markets such as India less attractive for investment.

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S. Naren, executive director and chief investment officer of ICICI Prudential AMC, highlighted that mid-cap and small-cap stocks are overvalued, while large-caps, though not cheap, are less overvalued in comparison. He advised investors to temper their return expectations in the near term, as valuations remain high.

The Nifty is currently trading at a price-to-earnings (P/E) multiple of 20.03, below its five-year average of 24, Bloomberg data showed. In comparison, the Nifty Smallcap 250 is trading at a P/E of 28.93, closely aligned with its five-year average of 29.15.

According to Nitin Jain, chairman and managing director of wealth, asset and risk management platform Neo Group, though the Indian market is in a “mega bull run which can last for a decade,” the Nifty may remain in a range of 21,000 to 25,000 this year. “From a structural perspective, diversifying across high-quality companies across market capitalizations is key,” he said. Still, Jain believes mid- and small-caps are more likely to generate alpha for investors in the medium and long term, while large-caps provide a safety cushion against volatility and are likely to deliver steady, benchmark-aligned returns.

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In the past year, the Nifty has given 5% returns while the Nifty Smallcap 250 has gained 11%.

Gaurav Dua, head of capital market strategy at Mirae Asset Sharekhan, highlighted the risk in the broader market and the fact that the risk-reward balance appears better in large-caps now.

“From hereon, we believe that the large part of price damage is behind us in large-cap stocks,” he said. However, he believes the correction could be extended in small and micro-caps. Moreover, “given the pressure on rupee, we expect some of the export-driven sectors like pharma, garments and IT services to outperform domestic demand-driven sectors,” he added.

Dua also advises some exposure to precious metals, as gold would also benefit from macro uncertainties and rupee depreciation.

Naren noted that the rupee has appreciated against most currencies except the dollar, indicating the issue lies with the dollar’s strength rather than the rupee. He said a potential trigger for market recovery would be the stabilization of the dollar. At a call with reporters, he emphasized that any further market correction would present better opportunities for long-term investors.

Market experts have underscored that Indian equities are grappling with a climate of uncertainty, driven by factors such as the anticipated policies of US President-elect Donald Trump, the Union Budget 2025-26, and the potential exodus of foreign investments.

Also read | Market valuations to Trump 2.0: What Prashant Jain is telling his investors

Meanwhile, a 13 January report by Kotak Institutional Equities said, “The recent sharp correction in the Indian market and stocks across caps does not change our cautious outlook for the market, given (1) full-to-frothy valuations in most parts of the market, (2) low scope for earnings upgrades, given fairly aggressive earnings, profitability and volume assumptions across sectors and (3) uncertain global macro-environment and likely higher-for-longer bond yields and interest rates”.