Make Safer Bets as Experts See a Deeper Correction

Now, markets have stated a comeback, so have the smids vs bluechip dilemma.

Chasing High Returns often requires Investing in Small- And Mid-Cap Stocks for their explosive growth potential-A high-RISK, High-Reward Strategy.

However, according to market experts, it could be in retail investors’ Best Interest to Curb Their Enthusiasm because if earnings continue to underwhelm, Smids COLDS COLD SEE A Deeper Correction.

Low earnings, high valuations

The March Quarter Earnings Have Largely Disappointed, with Most Companies in the BSE 400 Failing to Deliver meaningful Growth, Said Saurabh Mukherje, Founder, Founder and CHIEF Investment Office (Cio) Investment Managers, Adding that Valuations are Once Again Creeping Into Expensive Territory.

To be sure, the nifty smallcap 250 is trading at a price-to-earnings (p/e) ratio of 33.35, significantly lower than it about a decade-link Average of 48.20, while the nifty midcap 100 is trading at a P/E of 33.38, Well BELOW Its 10-Year Average of 45.65, According to Bloomberg,

He Advised Investors to Trim Exposure to Small- And Mid-Caps and Focus on High-Quality Large-Cap Stocks, Warning of a Potential Deeper Correction, Possibly 30-40%.

The nifty 50 is currently trading at a P/e of 21.88, Slightly Above Its 10-Year Average of 20.89. Besides, The Nifty 50 has Risen Over 6% in 2025 Against the Nifty Midcap 100’s 4.34% Gain and the Nifty Smallcap 250’s 1.17% Fall.

Harsha Upadhyaya, President and Chief Investment Officer (Cio) at Kotak Mahindra Asset Management Co. Ltd, agreed, Saying the 2024-25 earnings story has not exactly played out as expected. “We kicked off the year with hopes of 15-16% earnings growth for large-caps and around 20% for small- and mid-caps. But, actual numbers have fallen short.”

According to Kotak Mutual Fund Estimates for 2024-25, The Nifty 50 Earnings Grew 6%, The Nifty Midcap 150 12%, and the Nifty Smallcap 250 16%.

Looking at the March Quarter Earnings, Small-Caps have had a rougher ride.

“If we split 4QFY25 performance in terms of market capitalization, we see 31% of small-cap companies Missed Expectations, While The Misses WRE LOWER In Mid-Caps and Large-Caps at 28% and 17%, Respatively, “Said a 3 june report by jm Financial Institutional Securities.

Hopes of recovery

That said, the market is still holding on to hopes of a recoverry across segments over the next Couple of Quarters. If that plays out, valuations might remain elevated. “But if earnings continue to disappoint, small-caps bill face a sharper dereting.”

The only thing that can support higher valuations of small-caps-nd mid-caps in that order-is superheror growth over large-caps, which was the case from 2020-21 to 2023-24, Upadhyaya SAID. During the period, the nifty 50 earnings when a compound annual growth rate of 25%, less than the nifty midcap 150’s 41%and the nifty smallcap 250’s 32%.

“In 2024-25, we have seen that kind of outperformance. If it returns, these pricey Valuations May Stick Around. But if earnings Momentum Slips, The Broader Market COLD SEE A CORRECTION,”

Meanwhile, Small-Cap Funds Remain An Investor Favourite Despite The Concerns of a Bubble. In 2025, they have consistently cornered the largest share of declining monthly inflows in equity mutual funds.

Sailesh Raj Bhan, Cio of Equity Investments at Nippon India Mutual Fund, Noted That A Systematic Investment Plan with A Medium-Term Horizon is a Reasonable Strategy For Mid-Caps Stocks.

Thought Large-Caps Stand out as Sensibly Priceed, He Added.