Explained: Why small and midcap stocks are under pressure today

Public Sector Undertaking (PSU) stocks, particularly in sectors such as defence, railways, and non-banking financial companies (NBFCs), have been hit hard.

In Short

• Sensex and Nifty gain, but PSU stocks decline sharply
• PSU stocks face correction despite Sensex hitting record highs
• Fed rate cut boosts large-caps; smallcaps, PSU stocks struggle

Benchmark stock indices surged in early trade on Wednesday, reaching record highs following the US Federal Reserve's unexpected interest rate cut.

The S&P BSE Sensex climbed 244.82 points to 83,193.05 by 1:26 pm, while the NSE Nifty50 increased by 39.55 points to 25,417.10.

Despite this strong start, both indices have retraced from their highs but remain in positive territory.

In contrast, smallcap and midcap stocks have faced significant declines.

The Nifty Smallcap index plunged nearly 2%, and the Nifty Midcap index dropped over 1.5% at the time of writing. This divergence between large-cap gains and the broader market’s decline has raised questions among investors.

Public Sector Undertaking (PSU) stocks, particularly in sectors such as defence, railways, and non-banking financial companies (NBFCs), have been hit hard, with shares falling by up to 6%. Oil India dropped 5.92% to Rs 559.55, and Hindustan Aeronautics Ltd (HAL) fell 4.61% to Rs 4,232 on the Bombay Stock Exchange (BSE).

The BSE PSU index declined by 1.5%. Other notable decliners included BEML Ltd, down 4.95%, Bharat Dynamics Ltd, and Cochin Shipyard Ltd, both dropping 5%.

Santosh Meena, Head of Research at Swastika Investmart Ltd, shed light on the current market dynamics. “The midcap and smallcap segments, particularly sectors like defense, railways, and capital goods, which have performed exceptionally well over the past 2-3 years, are now witnessing a sharp correction,” he said.

Meena further explained, “Valuations have long been a concern in the broader market, yet these stocks continued to rally despite being considered expensive. However, there always comes a point when market euphoria fades. Domestic institutions, too, have shown signs of caution, holding significant cash reserves at elevated levels. I believe this correction could extend further, presenting a strong buying opportunity in high-quality stocks for long-term investors.”

The sharp declines in smallcaps and midcaps, especially PSU stocks, reflect broader concerns about high valuations as experts recommend shifting to largecap alternatives.