Midcap and smallcap stocks in the Indian market are entering a compelling phase, offering fresh value to investors as their recovery is increasingly underpinned by strong earnings, according to Devang Mehta, Deputy MD and CIO for Equity at Spark Capital Private Wealth.
Mehta's insights, shared on July 4, 2026, challenge the notion that the broader market rebound is purely momentum-driven. He emphasizes that while liquidity plays a role, underlying profit growth has significantly improved the risk-reward equation for these segments.
Earnings Drive Broader Market Comeback
While the BSE large cap index has seen a 4.17% decline in 2026, the Nifty small cap 100 index has climbed 8.25%, and the Nifty midcap 100 index is up 2.82% during the same period. This divergence highlights a shift beyond the performance of market heavyweights.
Mehta attributes this strength to a fundamental earnings recovery, distinguishing it from a mere sentiment bounce. He argues that investors may be underestimating the extent to which profit growth has solidified the investment case for mid- and small-caps, especially after a prolonged period of underperformance.
Three Phases of Market Correction
The market has undergone three distinct phases of correction, as described by Mehta: a sharp price correction, a valuation correction, and a time correction. The extended time correction, lasting roughly one to one-and-a-half years, allowed corporate earnings to catch up while stock prices remained subdued. This consolidation has created a substantial “margin of safety” for midcap and smallcap segments, mitigating the froth that previously concerned investors.
Opportunities Beyond Benchmark Indices
Mehta points out that benchmark indices like the Nifty often concentrate on sectors such as banking, IT, and oil and gas. However, India's economic landscape offers numerous niche industries populated by listed companies outside these benchmarks. This creates significant room for skilled stock-pickers to identify high-potential opportunities.
He also noted that despite general assumptions about foreign institutional investor (FII) exits from large-caps, there have been instances where FIIs have increased stakes in select mid- and small-cap names, suggesting a broader investment perspective.
Investor Focus: Selectivity and Long-Term View
While optimistic, Mehta cautions against indiscriminate buying. He stresses the importance of selectivity, urging investors not to “paint everything with the same brush.” For those willing to navigate potential volatility and maintain a focus over the next three to five years, he believes midcap and smallcap stocks present a very attractive proposition. This outlook aligns with his broader view that domestic participation, easing macroeconomic headwinds, and stronger earnings pockets are reshaping market leadership on Dalal Street.