Small and Mid-Cap Stocks Experience Significant January 2026 Selloff
In a notable market development, small and mid-capitalization stocks have faced intense selling pressure during January 2026, with indices registering substantial declines. Market analysts attribute this correction primarily to concerns over stretched valuations following years of strong performance and recent lackluster corporate earnings.
January Performance Shows Sharp Declines
The BSE Smallcap index has fallen approximately 7 percent so far in January 2026, while the BSE Midcap index has declined around 4 percent. This represents a continuation of the downward trend observed in late 2025, but with accelerated momentum in the new year.
Specific index performances reveal the extent of the correction:
- The BSE Smallcap index shed 3,649 points, closing at 47,876.05 on January 22 from 51,525.46 on December 31, 2025
- The NSE Smallcap 100 declined 5.85 percent, settling at 16,677.25 on January 22
- The BSE Midcap index tumbled 4.3 percent through the first 16 trading sessions of 2026
- The NSE Midcap 100 slid 3.79 percent during the same period
Historical Context and Valuation Concerns
Small and mid-cap stocks experienced remarkable growth between 2020 and 2024, with the BSE Smallcap index soaring 32 percent in 2020 alone. This bull run was fueled by increased retail participation through both direct stock trading and mutual fund investments during the Covid period.
However, this sustained inflow created valuation concerns that began manifesting in 2025. According to market experts, the primary trigger for the current selloff is the perception that these stocks remain overvalued despite recent corrections.
"The fact is that mid and small-cap stocks continue to remain overvalued even now. The main factor weighing on small and midcap stocks is the high valuation because domestic investors had started investing huge amounts of money in these stocks," noted V K Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd.
Earnings Growth Slowdown Compounds Problems
The valuation concerns have been exacerbated by slowing corporate earnings growth. After achieving an impressive 24 percent compound annual growth rate between 2020 and 2024, corporate earnings declined to just 5 percent in fiscal 2025.
This earnings slowdown has triggered outflows from small and mid-cap stocks as investors reassess their positions. Market experts emphasize that in the long run, market trends are dictated by earnings growth, and the current environment presents challenges for these segments.
Expert Perspectives on Market Conditions
N Aruna Giri, CEO of TrustLine Holdings, observed that "it has been a one-way fall for the small-cap index since the start of November last year." He further noted that many stocks have declined 40-50 percent, with nearly half the market, particularly across the small-cap spectrum, experiencing significant drawdowns.
Regarding valuations, Giri explained that before the current correction, the small-cap index was trading at around 28-30 times trailing earnings. Post-correction, valuations have moderated to about 25-26 times, but this still represents a substantial premium to long-term averages.
Investment Strategies for Current Market Conditions
Market experts advise adopting a prudent approach amid the ongoing selling pressure and elevated valuations. While the correction has been significant, most analysts caution against viewing this as a simple "buy-on-dips" opportunity.
Key strategic considerations include:
- Selective investing: Investors should focus on stock-specific opportunities rather than broad market exposure
- Bottom-up approach: Identifying fundamentally strong companies with sustainable business models
- Patience and caution: Avoiding impulsive decisions while waiting for more attractive entry points
- Portfolio review: Assessing current holdings and rebalancing as necessary
Giri emphasized that "at the stock-specific level, for truly bottom-up and selective investors, many compelling opportunities are emerging across small and midcaps, provided one is extremely choosy."
Long-Term Outlook and Investor Implications
The current market correction serves as a reminder of the inherent volatility in small and mid-cap segments. While these stocks offer potential for higher returns, they also carry greater risk, particularly during periods of market stress.
Investors with significant exposure to these segments experienced portfolio declines in 2025, highlighting the importance of diversification and risk management. As the market continues to adjust to changing economic conditions and corporate performance metrics, a disciplined investment approach remains crucial for navigating the current environment successfully.
