Market sell-off deepens as midcaps enter correction zone

Midcaps enter correction as sell-off deepens<br> — The Nifty Midcap 150 has fallen 10.2% from its 52-week high recorded on August 31, after declining 1.4% on Wednesday.

Mumbai: The recent sell-off in Indian equities has pushed the Nifty Midcap 150 index into correction territory, with small-cap and micro-cap indices not far behind.

The Nifty Midcap 150 has fallen 10.2% from its 52-week high recorded on August 31, after declining 1.4% on Wednesday. The Nifty Smallcap 250 index has dropped 8% from its September 8 high, following a 2.3% fall during the day.

The Nifty Microcap 250 index is down 8.1% from its recent high in the first week of October after tumbling 2.6%. The Sensex and Nifty, which ended around 0.5% lower each on Wednesday, have declined nearly 15% so far in 2026.

Although there is no universally accepted definition of a market correction, a decline of 10% or more, but less than 20%, from a recent high is generally considered one.

Many smaller stocks have broadly withstood the weak sentiment in the market and sharp declines in blue chips over the past two years thanks to a flood of retail money through equity mutual funds and directly. But concerns over elevated valuations are beginning to catch up as investors evaluate whether the broader risk-off sentiment could impact future returns.

Over the past two years, the midcap and smallcap indices have each entered correction territory three times. The midcap index fell nearly 19% from its January 2025 high to its February low. The smallcap index fell nearly 26% in this period, entering bear market territory but subsequently recovered.

Anand Radhakrishnan, managing director of Sundaram Mutual, said some domestic investors had shifted money from large-cap stocks to mid-cap and smallcaps, viewing them as safe amid foreign investors' selling. This perception could be slowly shifting with valuations rising.

"What is perceived as a safe space can gradually become unsafe as valuations go up. We are seeing corrections even in midcap and smallcap stocks, although this may not yet be visible at the index level," he said.

Of the 97 stocks in the midcap index that have hit 52-week highs so far in 2026, two have fallen 40-45% from their peaks, 18 have declined 30-40%, 35 have lost 20-30%, and 42 are down 1-20%.

In the smallcap segment, 172 stocks have hit 52-week highs so far this year. Of these, nine have declined 40-45% from their peaks, 32 have fallen 30-40%, 54 have lost 20-30%, and 77 are down 1-20%.

In the microcap segment, 165 stocks have hit 52-week highs this year. Of these, seven have fallen 40-50%, 23 have declined 30-40%, 64 have lost 20-30%, and 70 are down 1-20%.

Even after the recent declines, valuations are still at a premium over large-caps. The mid-cap index is currently trading at a 42% premium to the Nifty, compared with its five-year average of 40%. The small-cap index is trading at a 45% premium, below its five-year average of 75%, analysts said.

"Small and mid-cap valuations have come off from very high levels but remain on the higher side," said Atul Bhole, executive vice-president and fund manager at Kotak Mahindra AMC. "That said, the aggregate earnings outlook is holding up very well, with 16-20% earnings growth projected for the midcap and smallcap universe. Any improvement in news flows on the war, crude prices and yields could cause a relief rally."