Forget Nifty50 stocks: Smallcaps soar up to 200% in 2026. Will the mammoth rally continue?

For months, Indian equities have been telling two very different stories. On one side, the Nifty 50 has struggled under the weight of rising crude oil prices, geopolitical uncertainty and foreign investor selling. On the other hand, the smallcap universe has quietly emerged as the market's biggest winner, delivering outsized gains and defying the broader weakness.

The divergence has been striking. While the Nifty Smallcap 250 has gained 10% in 2026, the Nifty has fallen 6% over the same period. Even the sharp March correction, when the smallcap index tumbled 8% amid the Iran conflict, surging crude oil prices and heavy foreign institutional investor outflows, has done little to dent the broader trend.

The rebound has been powered by improving earnings, resilient domestic liquidity and renewed investor appetite for bottom-up stock picking.


The result has been a fresh crop of multibaggers, led by HFCL, which has surged 212% so far this year. Aditya Infotech follows with a 139.70% year-to-date return, while Acutaas Chemicals has gained 109.25%. Syrma SGS Technology has rallied 93.90%, and the remaining six stocks in the top 10 have delivered returns ranging between 73% and 92%.

Also read:Why India's mid & smallcaps are outrunning Nifty 50 & where to invest now? Rajesh Kothari explains

Earnings boost

The rally has been backed by earnings rather than just momentum. According to Motilal Oswal, companies in its smallcap coverage universe (168 companies) delivered 19% year-on-year earnings growth, broadly in line with its estimate of 18%. Importantly, 68% of the companies either met or exceeded the brokerage's expectations.

Domestic liquidity has also played a key role. Systematic Investment Plan (SIP) inflows into mutual funds have remained resilient despite global uncertainty, while domestic investors have gradually returned to selective buying in the midcap and smallcap space after nearly two years of subdued performance across several pockets of the market.

Valuations attractive?

The sharp recovery has followed a meaningful correction earlier this year. Valuations across the smallcap segment compressed significantly during the March selloff, taking earnings multiples close to one-year lows. Since then, stabilising crude oil prices and improving risk appetite have helped drive a rebound.

Samir Vartak of SageOne Investment Managers believes valuations remain reasonable despite the rebound. "For India, I do believe that price-to-book for smallcaps is pretty reasonable. They are definitely below the median of the last five-six years and more importantly the earnings growth has picked up. Earnings growth momentum will continue irrespective of what happens with the war because smallcaps are not that much impacted by geopolitics and the valuations are reasonable."

Read more: Midcaps and smallcaps currently offer more disproportionate growth opportunities than largecaps: Deepak Shenoy

For Capitalmind CEO Deepak Shenoy, the divergence between largecaps and smaller companies is fundamentally about growth. "So, the game is very different at the largecaps and then the midcaps and smallcaps are going to behave differently in terms of growth. So, I would pay 20 times earnings for companies growing 25% a year.

That is because they are growing so much faster... I would pay 20-22 times, in fact sometimes even 30 times for something that is growing 25% a year,” he told ET Now, adding that he may not pay that much for something that is growing only 10-12% or just about GDP level.

Contra view

Not everyone, however, believes the rally will continue unabated. Prashant Jain, CIO, 3P Investment Managers, believes largecaps now offer better value.

"In my opinion as a category smallcaps versus largecaps, largecaps are offering better value to my mind and they have borne the maximum brunt of the selling by foreigners and as macro turns, as this foreign selling abates, it may over time even turn to positive flows, largecaps should outperform smallcaps as a category.

A similar note of caution comes from Kunal Vora of BNP Paribas India. "Midcaps and smallcaps have benefited from the fact that there was no heavy FII ownership. FII ownership was disproportionate in the largecaps. Similarly, a lot more domestic money was coming into mid and smallcaps where there was momentum.

"They have become a lot more expensive and the premium compared to largecaps has increased meaningfully. What we see is a lot more value in the largecap space compared to mid and smallcaps right now where there is still some froth which could get corrected."

Will outperformance continue?

Nifty 50 median EPS growth was stuck at roughly 9-10% through FY25 and FY26. Forward estimates now pencil in 14.3% for FY27 and 16.5% for FY28. Midcap and smallcap estimates are even more aggressive — 21.6% and 24.8% respectively for FY27.

Ashish Chaturmohta of JM Financial, expects the outperformance to continue. "If you see the relative strength of most of the midcap and smallcap indices, it is much better than the broader indices. Not just from the price perspective, but if you look at the last quarter earnings review, the midcap stocks have seen earnings growth of almost 26% and the smallcap companies have shown profit growth of almost 18%, whereas the largecaps have grown at just 11%.

"So, markets are rewarding this entire mid and smallcap space because of a very strong earnings trajectory. With crude also stabilising and rupee weakness showing signs of topping out, margin pressures should ease".

Risks remain

While Q4 earnings remained resilient, the full impact of the West Asia conflict is likely to be felt in Q1 FY27 rather than Q4 FY26. Most companies entered the March quarter with sufficient raw material inventories, which helped cushion supply disruptions and contain cost pressures.

In Q1 FY27, however, elevated crude oil and natural gas prices, procurement disruptions, a weaker rupee, and higher logistics and insurance costs are expected to weigh on margins across sectors. A weak monsoon also remains a key risk, with the potential to hurt rural demand and trigger earnings downgrades in consumption-linked segments.

That said, easing tensions in West Asia could provide some relief from Q2, say experts.

For now, though, the smallcap rebound has reignited investor interest in a segment that many had written off. Whether the rally has further room to run may ultimately depend less on momentum and more on one factor that has driven it so far: earnings.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)