Mid and smallcap stocks could see strong gains in 2027, but expect volatility, says Deepak Shenoy, Capitalmind Mutual Fund

Mid and smallcap stocks could see a stronger rally in 2027, although investors should be prepared for significant volatility along the way, said Deepak Shenoy, Founder and CEO of Capitalmind.

Shenoy also expects earnings growth of over 20% in these market segments, which could support further gains. The stocks of companies delivering strong growth could see meaningful gains, while those failing to meet growth expectations may face pressure.

In his 20th annual Diwali outlook, Shenoy expects 2027 to be a momentum-driven year for the Indian stock market, with mid- and small-cap indices likely to rise despite periods of significant volatility.


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He said: "I don't think it's useful to predict the Nifty, but Midcaps and smallcaps, even as an index, should rise in the coming year. I see the market falling in between as well - we will see large volatility."

Shenoy expects India to record earnings growth of more than 20% in the mid-cap and small-cap segments over the next year. However, he believes valuations will vary from company to company.

According to Shenoy, companies delivering strong growth could continue to command high price-to-earnings (P/E) multiples. On the other hand, companies that fail to deliver growth could face a sharp market reaction. He expects 2027 to be a momentum year, with stock prices rising meaningfully.

Shenoy expects the recent election results in the US and Israel to reduce some of the enthusiasm for war. However, he does not expect hostilities in the Middle East to end completely. He also pointed to the possibility of conflicts in other regions, including Cuba, which could keep global markets on edge.

Shenoy expects the US artificial intelligence (AI) trade to face a major setback. He believes the sector could witness bankruptcies and forced mergers as the risks associated with leverage come to the fore.

According to him, the impact of excessive borrowing in the AI trade could extend to US and global debt markets. Such developments could eventually push the US towards cutting interest rates, with Japan and Europe potentially following suit.

Shenoy expects high inflation to persist in India until the middle of 2027. He believes this could lead to rising interest rates during this period.

He also expects gold and silver prices to moderate further. Meanwhile, bank credit growth could ease slightly from the current level of 18%, although he expects it to remain strong enough to support nominal GDP growth of around 12%.

In his annual Diwali post, published on November 7, Shenoy revisited his predictions from 2025, assessed how they played out over the past year and shared his outlook for the year ahead. He also acknowledged that predicting market movements is difficult, pointing out that his track record over two decades has been almost evenly split between correct and incorrect calls.

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In his Diwali outlook last year, Shenoy had predicted that the Nifty would rise 20% and touch 30,000 before the next Diwali. He had also expected strong upward momentum that could challenge investors' understanding of market valuations.

However, the market did not follow that trajectory. The year witnessed the Iran-Israel-US conflict, a sharp rise in crude oil prices and an 11% monthly decline in April. The Nifty failed to reach the 30,000 mark and ended around 3% lower than its level during the previous Diwali. Shenoy gave this prediction a score of 0 out of 10.

He had also predicted that gold and silver prices would fall more than 20% from their peaks. Gold continued to rise after Diwali before reaching a peak in late January 2026, following which it declined around 20%. Silver fell more sharply, dropping approximately 50% from its peak.

However, both precious metals remained higher than their levels a year earlier in rupee terms. Shenoy also noted that the government's increase in gold import duty by around 9% in May had contributed to limiting the decline in domestic gold prices. He scored this prediction 10 out of 10.

Another prediction was that the US would experience a combination of recession and inflation, limiting the Federal Reserve's ability to cut interest rates meaningfully. Shenoy had also expected the recession to force the US to roll back some of its tariffs and predicted that the global economy would continue to deal with the consequences of trade tensions between the US and China.

While US inflation remained elevated, the economy continued to grow at around 3.4%, ruling out Shenoy’s recession prediction. Interest rate cuts and global geopolitical disruptions also shaped the year. He gave this prediction 3 out of 10.

Shenoy had also expected domestic investors to increase their investments in Indian stocks and mutual funds, while foreign investors would become less important to the country's growth story. He had forecast India's real GDP growth at 7% and nominal GDP growth above 10%.

Domestic investment remained strong, with monthly SIP contributions reaching a record Rs 34,000 crore in September 2026. Foreign institutional investors, however, sold nearly Rs 3 lakh crore worth of Indian equities during the year, although the impact on market indices remained relatively muted. Their return as net buyers in November also contributed to the market's recovery.

India's GDP grew 7.8% in real terms in the March quarter and 10.3% in nominal terms. Shenoy awarded this prediction 7 out of 10.

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His final prediction was that the rupee would touch 90 against the US dollar before recovering to the 80-85 range by Diwali 2026. Instead, the rupee weakened to around 97 against the dollar before recovering to approximately 94 in the days preceding the assessment. Shenoy attributed the recent improvement partly to a large FCNR-related move by the Reserve Bank of India in July and August 2026, which brought in around $130 billion. He scored this prediction 0 out of 10.

Shenoy gave himself an overall score of 20 out of 50 for his 2025 predictions, compared with 39 out of 50 in the previous year. He noted that his long-term track record over 20 years was only slightly above 50%, reinforcing his view that market predictions are not a particularly reliable basis for investment decisions.

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

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