How severe is the selloff in small- and mid-cap stocks during the stock market correction

The Indian stock market is currently undergoing a correction, with small-cap and mid-cap stocks facing significant pressure, particularly due to aggressive selling by foreign portfolio investors (FPIs). Despite this, ICICI Securities noted that the small-cap and mid-cap indices have shown relative resilience compared to the Nifty, signaling moderate selling in these segments. 

However, the broader picture is concerning, as over two-thirds of small-cap and mid-cap stocks have entered bear territory, with 67% of the 1,020 stocks in these categories down by more than 20% from their 52-week highs. Most of these stocks reached their peaks earlier in 2024, only to witness sharp declines as broader market weakness took hold. Analysts attribute this downturn to factors such as disappointing earnings and overvalued stocks, which have dampened investor sentiment.

Foreign portfolio investors have reduced their stake in Indian equities to a decade-low of 16% as of October, a reflection of global risk-off sentiment. Despite this, domestic mutual funds have stepped in to support the market, investing Rs 64,700 crore overall, with Rs 12,100 crore allocated specifically to small, mid, and micro-cap stocks. 

However, earnings cuts following the Q2 results have raised concerns about future growth, particularly in the small-cap segment, which saw a significant reduction in earnings estimates by JM Financial. A notable portion of small and mid-cap stocks saw over 10% downward revisions to their earnings projections, signaling potential challenges ahead for these stocks. 

While mid-cap stocks may be better positioned for recovery, analysts caution that small-cap stocks are likely to face prolonged uncertainty, especially given their low liquidity and the potential for more significant losses in a risk-off market scenario.