Stock Market today: The midcap segment of the Indian stock market has been facing intense selling pressure since the beginning of 2025, with February continuing the downtrend. The Nifty Midcap index recorded an 11 percent decline in February after falling 6 percent in January. This marks its worst monthly performance in nearly five years, since March 2020, when the index had plunged over 30 percent.

In intra-day trading on Friday, the Nifty Midcap index dropped over 1,650 points, or 3.3 percent, amid a broader market selloff. Meanwhile, benchmark indices Nifty 50 and Sensex also shed nearly 2 percent during the session.

The correction in midcap stocks has been driven by lofty valuations and sluggish corporate earnings in the first half of FY25. Analysts also pointed to external headwinds such as tariff-related uncertainties and foreign institutional investor (FII) outflows to China, which have intensified the downturn.

Experts noted that weak earnings growth has failed to support the premium valuations midcap stocks commanded in previous quarters. Despite the continued market correction, many midcaps still trade at elevated levels, leaving room for further downside.

So far in 2025, midcap stocks have fallen nearly 17 percent, significantly underperforming the Nifty 50, which has declined over 6 percent. The Nifty Midcap 100 index has dropped more than 22 percent from its peak in September 2024, compared to a 13 percent fall in the Nifty 50.

Will the Midcap Correction Continue? Analysts Remain Cautious

Market strategists believe midcap stocks could face further downside risks in the coming months. According to Jefferies’ Greed and Fear report, the risk of outflows from dedicated midcap and small-cap funds will rise if these funds begin posting year-on-year losses, which could happen within the next three months based on current trends.

Jefferies’ global head of equity strategy, Christopher Wood, suggested that for the recent correction to be considered complete, midcap valuations must align more closely with those of large-cap stocks. Additionally, a downturn in US equities could also influence investor sentiment in Indian midcaps.

The report described the selloff in Indian stocks as primarily technical, driven by valuation adjustments rather than significant macroeconomic concerns. The most severe declines have been observed in high-beta domestic sectors such as real estate, infrastructure, and industrials—segments that had outperformed significantly in 2024.

Meanwhile, Kotak Institutional Equities also remains cautious on the outlook for small- and mid-cap stocks due to still-expensive valuations. Despite the Nifty Midcap Index and Nifty Smallcap Index correcting massively, analysts do not believe valuations have moderated sufficiently.

Additionally, it added that local mutual funds, insurance companies, and portfolio management services (PMS) firms have seen a slowdown in equity inflows. While net inflows remain positive, the trend has shifted from small- and mid-cap or thematic funds toward large-cap or balanced funds. Fund managers in the small-cap segment have turned more defensive due to concerns over a disorderly sell-off in case of sudden redemptions.

Market sentiment has also been dampened by cautious management commentary during recent corporate conferences. Investors have shown a preference for companies with strong demand visibility, even if valuations remain on the higher side, emphasised Kotak.

Overall, the midcap correction, which has been unfolding since the start of 2025, shows no signs of abating. With earnings growth failing to justify previous valuations, and FIIs reallocating funds to China, further downside risks remain. Analysts suggest that midcap valuations need to adjust further before attracting fresh investments. While domestic investors continue to support markets, shifting fund flows indicate a preference for stability over risk, making large-caps a safer bet in the near term.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.