Are mid- and small-caps poised to lead the next leg of the market rally? Experts explain why

India's mid- and small-cap stocks could lead the next phase of the market rally, supported by strong earnings momentum and an improving macroeconomic backdrop, according to Vinay Jaising, Chief Investment Officer and Head of Equity Advisory at ASK Private Wealth.

While geopolitical concerns and elevated crude oil prices dominated much of the first quarter of FY27, ASK Wealth believes the broader market is better positioned than large-cap stocks, provided the recently announced ceasefire in the Middle East holds and domestic growth conditions remain supportive.

Strong Q4 earnings

The optimism stems from better-than-expected corporate earnings in the March quarter. According to ASK Wealth, India Inc. delivered positive surprises in Q4FY26, with mid- and small-cap companies registering notable earnings upgrades.

Nifty companies recorded 15% year-on-year sales growth during the quarter, but profit after tax (PAT) growth excluding financials stood at just 4%, indicating pressure on margins among large-cap companies.

In contrast, mid-cap firms posted 27% growth in profits, while small-cap companies reported a 24% increase in PAT, significantly outperforming their larger peers.

"The tape has turned," Jaising said, suggesting that earnings momentum in the broader market could drive the next leg of the rally.

Macro headwinds

According to the wealth management firm, many of the macro risks that weighed on Indian equities are beginning to recede.

Crude oil prices have corrected sharply to around $78 a barrel following signs of a de-escalation in the US-Iran conflict. Lower energy prices could reduce India's import bill by $4-6 billion in June alone and help contain the current account deficit.

India's foreign exchange reserves, which have fallen by around $50 billion over the past four months amid rising energy costs and foreign institutional investor (FII) outflows, are also expected to recover. ASK Wealth estimates reserves could rise by $80-120 billion over the next year, aided by policy measures and renewed capital inflows.

The firm believes improving liquidity and a stronger rupee could eventually encourage foreign investors to increase their exposure to Indian equities.

Selective investing

Despite the positive outlook, Jaising cautioned against indiscriminate buying and advocated a selective approach rather than broad market exposure.

It sees opportunities in domestic capex beneficiaries, including infrastructure, capital goods and manufacturing-linked businesses. Companies benefiting from the government's Production Linked Incentive (PLI) schemes are also expected to remain in focus due to strong order books.

Among financial stocks, non-banking financial companies (NBFCs) and housing finance companies could gain from improved liquidity and continued consumption growth.

Globally, the firm remains constructive on businesses linked to the artificial intelligence ecosystem, particularly those involved in data infrastructure, telecommunications and energy supply.

Risks here to stay

Jaising highlighted several factors that could disrupt the market's upward trajectory.

A breakdown of the ceasefire agreement and a spike in oil prices above $90 per barrel could revive macro concerns. A deficient monsoon due to El Niño conditions may hurt rural demand, while expectations of RBI rate hikes beginning in October and renewed hawkishness from the US Federal Reserve also remain key risks.

Still, with earnings momentum strengthening and macro pressures easing, ASK Wealth believes India's mid- and small-cap segments are well placed to lead the next phase of the equity market rally.