Smallcap stocks hit hard; market breadth stays weak. What is next?

Benchmarks indices Sensex and Nifty on Tuesday resumed their recent downward trend, falling for seventh in the past nine sessions. But it is smallcap stocks that have seen the steepest fall. Against a 2.35 per cent drop in the BSE Sensex and 2.04 per cent decline in the NSE Nifty, the BSE Smallcap index has tanked 3.79 per cent in nine sessions into the New Year.  The BSE Midcap index has slipped 2.38 per cent during the same period. 

This is all reflected in the BSE market breadth, as suggested by advance & decline ratio, which stood at 0.80 for January 2026 so far, the lowest since February 2025's 0.72.  A value below 1 indicates bearishness. A total of 2,900-odd stocks from 4,200 actively traded stocks either delivered nil returns or were trading lower for 2026 so far, data compiled from corporate database AceEquity suggested.

Nuvama noted that December 2025 was the first month in which small and midcaps (SMIDs) underperformed large caps by more than 10 per cent YoY, breaking its 72-month streak. 2025 ended up with SMIDs underperforming large caps for the first time after nearly five straight years of outperformance.

Nuvama said SMID stocks underperformed in 2025 after consistently outperforming in 2020s, expecting this underperformance to continue given the liquidity pressures, higher earnings downgrades risks in SMIDs and still high relative valuations. 

Emkay Global said smaller companies are delivering better growth across multiple sectors such as staples, financials and  IT and it thinks the scope for alpha is higher in this segment. 

"Of course, the elevated valuations imply that investors will need to practice more caution when stock-picking in the SMID space," it said. 

Nuvama said, historically, SMIDs have done well during phases of easy liquidity. In 2025, the new RBI governor injected liquidity, which helped stabilise the broader markets.

"However, in recent months, liquidity conditions have tightened again mainly owing to the RBI’s forex interventions. A sustained reversal in the same would require strong FII flows. If they do not come through, then it could weigh on SMIDs’ returns," Nuvama said.