Small-Cap Stocks Under Pressure in 2025: Is This the Right Time to Buy

Market Performance

The year 2025 has been challenging for small-cap stocks. The Nifty Smallcap 100 index is down more than 9% year-to-date, marking a sharp contrast to the steady rise in large-cap stocks, with the Nifty 50 gaining 7% in the same period. Retail investors, who form a significant part of small-cap ownership, have felt the pinch as sentiment turned negative after two stellar years of returns.

Over shorter timeframes, the weakness is even more pronounced: the Nifty Smallcap 100 has slipped almost 7% in the past six months and about 6% in the last month alone, reflecting ongoing pressure across the segment.

Why Small-Cap Stocks Are Falling

Several factors have contributed to the downturn in small-cap stocks this year:

• Valuations Normalizing: After a strong two-year rally, small-cap valuations were stretched. Even with recent corrections, prices remain elevated for many names.
• Earnings Lag: While large-cap companies delivered solid results in Q2 FY26, small caps underperformed. Among Nifty Smallcap 100 constituents, around 90 companies reported only 1.5% growth in consolidated net profit.
• Profit Booking: Following the sharp gains in 2023 and 2024, investors have been locking in profits, shifting capital toward more stable large-cap stocks.
• Foreign Investor Sentiment: Foreign Institutional Investors (FIIs) trimmed exposure to broader Indian markets during the September quarter, further weighing on small-cap sentiment.

Historically, small-cap rallies are often followed by corrective phases that can last several months. The current correction aligns with this pattern, signaling a natural market cycle.

Why This Could Be the Right Time to Consider Small-Caps

Despite the ongoing pressure, certain indicators suggest a more favorable environment for long-term investors:

• Valuation Adjustment: The cooling off of frothy valuations has created a healthier setup for disciplined investors.
• Potential Earnings Revival: With broader earnings improvement, stable domestic inflows, and a favorable global interest rate scenario, small caps may recover and regain leadership in 2026.
• Selective Opportunities: Strong fundamentals and robust management remain critical. Well-managed, financially sound companies could offer attractive risk-reward prospects.

This phase may provide a window for long-term investors to selectively identify quality small-cap stocks. Historically, entering the market after a correction can allow investors to benefit from potential cyclical gains in the segment.

Nifty Smallcap 100: Key Levels

The Nifty Smallcap 100 index continues to navigate its corrective phase. Recent data shows:

• Current Level: Near 17,140
• Support Zone: 16,800–16,700, with 15,765 as a critical demand area from May 2025
• Resistance Range: 17,600–17,800 (short-term EMAs), with potential upside to 18,800–19,000 if recovery gains traction

These levels highlight where buying interest may emerge and where caution is warranted in the near term.

Summary

Small-cap stocks have struggled through 2025, yet market corrections are a normal phase in investment cycles. With valuations easing, earnings starting to stabilize, and macro conditions expected to improve in 2026, strong small-cap companies present potential long-term opportunities. Investors targeting financially sound and well-managed businesses may find this an ideal time to consider selective additions to their portfolios.