Correction in midcap, smallcap stocks an entry opportunity; TVS, Zomato best picks among ‘fallen angels’: Emkay Global | Stock Market News (2024)

FAQs

Why are small-cap and mid-cap stocks falling? ›

Market experts are anticipating a potential slowdown in the mid and small-cap segments due to their high valuations, which may have reached unsustainable levels.

“According to Wall Street analysts' earnings estimates, stocks on the S&P SmallCap 600 are expected to see a 22.1% rise in earnings in 2025 versus 14.8% for the S&P 500,” he says.

According to forecasts, the rest of the market will gain ground through the fall and overtake the Mag 7 in the fourth quarter. Taking a broader view of earnings growth, small-caps are expected to hold their own for the full year in 2024 and grow faster than large-caps in all regions in 2025. See Figure 2.

Investors with a high-risk appetite who want to invest in underpriced and under-recognised businesses and earn organically high returns (these returns are not influenced by larger financial institutions). Investors can get quality stocks at a fair price when they invest in small cap shares.

Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).

Several factors have contributed to small-cap underperformance, including (1) a decline in the average quality of companies included in small-cap indexes, (2) the greater rate sensitivity of small-cap stocks during a period of tighter monetary policy, and (3) muted M&A activity, which otherwise tends to benefit small- ...

The S&P 500 and NASDAQ 100 outperformed small caps (Solactive 2000) by more than 16% and 18%, respectively. Since the midpoint, however, the tables have turned. Small caps have rallied over 9% compared to just over 2% for the S&P 500, and less than 1% for the NASDAQ 100.

Risk. Small-cap mutual funds are very risky. This means that in the short term, investing in them could lead to short-term losses. If you cannot tolerate seeing negative returns on your investments at specific periods, you should stay away from small-cap funds.

1. U.S. small‑cap companies have tended to outperform their larger counterparts during periods of heightened inflation and rising interest rates. 2. Following periods of economic recession, U.S. small‑cap companies have generally led the market recovery—often going on to outperform larger companies over multiple years.

If, on the other hand, the economy begins to slow down or enter a recession, then mid-cap companies will outperform small-caps. As seen in the figure below, mid and small-caps (represented by the S&P 600) perform well in the early stages of the business cycle as soon as people sense a recovery.

Are US small caps undervalued? ›

To some, that means small caps have room to run. At the end of May, while large-cap stocks traded at fair value, "US small-cap stocks were the most undervalued compared to their long-term fair value, offering approximately a 20% discount to fair value," says David Sekera, chief US market strategist at Morningstar.

“Our expectation is that this dynamic will begin to reverse itself later this year as small-cap profits continue to recover via back-end loaded growth in 2024 and into 2025.”

Small-cap companies have the potential for high rates of growth, making them appealing investments, though their stocks may experience more volatility and pose higher risks to investors.

Small-cap stocks have the least liquidity and investors who do not transact in these shares via small-cap funds can encounter difficulty in transacting in these shares. Mid-cap stocks have high growth potential but an investor needs to have a strong risk tolerance to invest in them.

The S&P 500 has had a strong run in 2023 but its performance is heavily skewed by seven mega-cap companies. Investing outside of mega-caps and other high-flying stocks could be a hedge against a possible reversal of fortune for these companies.

Looking forward, we expect value stocks should continue to outperform. Not only are they undervalued, but they also should perform better in an economic environment where we forecast the rate of economic growth will slow sequentially for the remainder of this year and remain sluggish in the first half of 2025.

Anirudh Garg is the founder, Partner and Fund Manager at Invasset PMS. Both the midcap and smallcap segments are overvalued at the moment, which calls for a cautious approach from investors, according to Anirudh Garg, who is the founder, partner and fund manager at Invasset PMS.