Aniket PujariThe Nifty Smallcap 100 index — now on the verge of slipping into correction territory — has sharply underperformed in the current calendar year. The index has fallen more than 9% on a year-to-date basis, dealing a significant blow to retail investors, who are among the biggest shareholders in these companies.
This year’s profit taking comes on the heels of two back-to-back years of massive returns, as investors are worried about valuations running ahead of fundamentals. In the year 2024, the Nifty Smallcap 100 index rallied 24%, following a 56% rally seen in the index in 2023.
| Nifty Smallcap 100 index returns | |
|---|---|
| Year | Annual Returns |
| 2025 | -8.37% |
| 2024 | 23.94% |
| 2023 | 55.62% |
| 2022 | -13.80% |
| 2021 | 59.28% |
| 2020 | 21.47% |
| Source: Trendlyne | |
“Through 2024–25, the index rallied over 70%, far outpacing earnings growth, and traded at a premium to its 10-year average P/E. Once liquidity tightened globally and domestic risk appetite moderated, small caps—being the highest beta segment—became the first to absorb the correction,” said Harshal Dasani, Business Head, INVAsset PMS.
Fundamentally, Q1 and Q2 FY26 earnings for several constituents showed margin compression due to input-cost volatility and weaker export demand. This combination of elevated valuations, earnings divergence, and regulatory caution has created a near-term derating phase, Dasani added.
Motilal Oswal Financial Services (MOSL) in its Q2 earnings review said that small-cap earnings dipped 5% YoY (our est. of 3% growth), with 40% of the coverage universe missing its estimates. Conversely, within the large-cap and mid-cap universes, 19% and 22% of the companies, respectively missed estimates.
2026: A year of rebound for small-caps?
However, going ahead, both technical and fundamental factors indicate that the revival in the small-cap index cannot be ruled out, as India’s strong economic growth momentum, along with RBI easing, is expected to give a leg up to the minnows of Dalal Street.
Small caps historically outperform in the 12–18 months following a period of monetary easing, and with the RBI already beginning its rate-cut cycle in mid-2025, the transmission into lower borrowing costs should become visible by early 2026, noted Dasani.
“Earnings, too, are expected to recover in H2 FY26 as demand normalises, and input costs stabilise. While valuations needed to cool — and have now done so meaningfully — fundamentals across manufacturing, defence, engineering, and capital goods remain intact. A measured rebound looks probable once the valuation–earnings gap narrows sufficiently,” he added.
Nifty Smallcap 100 index target for 2026
Technically, analysts are pegging the Nifty Smallcap 100 index target at 22,000 levels, signifying a 25% surge from the 17,000 levels the index is currently hovering around.
Our expectations are that this underperformance in the small-cap index is likely to end, and an upside of 20-25% can be achieved by December 2026, thus providing wonderful investment opportunities for the long term, said InCred in its note earlier this month. It has pegged the target at 21,300 to 22,200 levels.
The index witnessed a strong price correction in March this year, and since then, it has been undergoing a time correction. Interestingly, the index bounced back sharply after retesting the multiyear breakout, implying the worst seems over and it can pick up strong momentum in the coming months, said the brokerage. “The RSI has also bounced from a strong support zone with early signs of hidden bullish divergence, which supports the postulate of a strong upside.”
Drumil Vithlani, Technical Analyst at Bonanza, also shared a bullish view on the index, calling this underperformance a healthy consolidation rather than a trend reversal.
“The index is holding above the 20-month EMA and key support at 15,600, indicating that long-term momentum remains intact. RSI around 53 reflects a neutral, non-overbought setup, leaving room for an upside reversal. Historically, smallcaps tend to outperform after corrective phases. As long as the index defends 15,600, a gradual recovery through 2025–26 is likely, supported by domestic liquidity and earnings momentum,” the Bonanza analyst added.
He sees a base-case December 2026 target: 18,800–19,600, with a bull-case extension toward 20,500–22,000 if the index breaks above the 18,500–19,000 ceiling.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
