BSE Sensex rallies strongly in first half of 2025: What's the outlook for the rest of the year & will small cap stocks do well? What experts say

Time of India

6 hours ago

Whilst conditions appear favourable for small-cap growth, success will depend on careful analysis and selective investment choices. (AI image)
India's equity market appears set for a significant transformation as it enters the latter half of 2025. The first half of 2025 witnessed the
Sensex
climb approximately 8%, displaying notable strength in large-cap shares that guided Indian equities towards possible new heights.
The Sensex has demonstrated remarkable growth, advancing 6,000 points over six months and currently stands 2,000 points below its peak levels.
However, the market presents a contrasting scenario: despite the strong performance of blue-chip companies, the BSE Smallcap index has declined by 1.7% since January, whilst mid-sized companies have maintained relatively stable values, according to an ET report.
Recent months have shown considerable changes in market dynamics, leading industry experts to consider whether smaller companies might dominate the remaining months of the year.
Several optimistic market analysts have begun forecasting unprecedented market levels.
Karthick Jonagadla, who leads Quantace Research as Founder & CEO, has presented particularly ambitious end-of-year projections.
"We peg December-end targets of Nifty 26,500 and Sensex ~95,000, implying mid- to high-single-digit upside from current levels and new peaks well before calendar year-end," Jonagadla was quoted as saying by ET, backing his bold prediction with three powerful catalysts.
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The RBI's assertive monetary policy, including a substantial 50 bps reduction in June bringing the repo rate to 5.50% and indicating a neutral position, has boosted market sentiment. This, coupled with unprecedented retail investments where SIP contributions reached Rs 26,688 crore in May, maintaining above Rs 20,000 crore for ten consecutive months, has strengthened market confidence.
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International investment has shown positive trends, with "Foreign investors returned with about $5.5 billion of block-trade buying in May alone."
FIIs have maintained net buying positions across the previous four months.
A significant transformation is occurring in the smallcap sector, which is altering market patterns. Following a period of severe decline, smaller enterprises have demonstrated a remarkable recovery.
"Smallcaps have staged a strong comeback. The BSE Smallcap index rose more than 20 percent in the second quarter. Midcaps also recovered.
Momentum is building in the broader market, driven by improving fundamentals and stronger flows," Krishna Appala, Fund Manager at Capitalmind PMS was quoted as saying.
Jonagadla anticipates continued growth: "Three forces should keep that tailwind alive in H2. Liquidity is turning supportive. Policy rates are falling just as earnings momentum broadens. Valuations have cooled."
Technical indicators show significant improvement: "After the Q1 sell-off, the Nifty Smallcap 250 now trades a little below its 5-year median PE; profit-taking in June shows froth has come out of the trade."
The earnings forecast remains positive: "Consensus still sees mid- and small-cap EPS growing in the high-teens for FY26."
Small cap rally on the cards?
The sustainability of the small-cap market recovery remains debatable. Expressing significant reservations about the broader market upswing, Amit Jain, Co-Founder of Ashika Global Family Office Services, maintains a conservative outlook.
"Despite the recent bounce, we remain cautious on the smallcap and midcap space heading into H2," Jain warned.
"This rebound has been driven more by liquidity than fundamentals. Valuations in many pockets remain stretched, and earnings upgrades have not kept pace with price action."
He elaborates on additional risks beyond valuations: "Moreover, broader market participation is thinning, and concentration risk is high. The rally has largely bypassed companies with weak balance sheets or inconsistent cash flows, which still make up a large portion of the smallcap universe."
His assessment concludes with a clear caution: "Unless earnings catch up meaningfully or we see strong policy tailwinds, the risk-reward for fresh entry into this segment looks limited."
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As the market transitions to its next stage, clear industry leaders are becoming apparent.
The financial sector shows strong performance. "Lower policy rates and relaxed provisioning norms boost credit growth; PFC and REC leapt ~4% when the RBI's new rules landed, and PSU-bank indices hit six-month highs," Jonagadla noted.
Appala agrees: "Lower interest rates are helping banks and NBFCs. Credit growth remains strong, and asset quality is stable."
Infrastructure and capital goods sectors benefit from increased government investment. "Order books are overflowing—L&T reported a record ₹1 trillion intake in Q4 FY25—underpinned by ongoing central and state capex," Jonagadla said.
Consumer spending shows positive momentum. "Rural demand is improving, and urban consumption is steady.
FMCG, two-wheelers, and discretionary segments are showing healthy trends," Appala explained, pointing to improving "sales of two-wheelers, tractors, and FMCG products."
Nevertheless, careful stock selection remains crucial. "Export-oriented pharma and chemicals could lag amid U.S. tariff noise, and defensives look fully valued," Jonagadla cautioned.
Stock market Outlook
Indian benchmarks demonstrate notable stability despite global market volatility from geopolitical conflicts, with Jain forecasting that indices could reach "further upside toward 26,500-27,000 in the coming months."
Regarding small and midcap investments, Jonagadla maintains a balanced perspective: "H2 should show better absolute returns than H1, yet dispersion will stay wide, rewarding bottom-up quality screens."
Appala presents a straightforward assessment: "There are good reasons to believe so. Inflation has cooled, the RBI has started cutting rates, and rural demand is recovering. These tailwinds support a more positive setup for smaller companies.
However, valuations in this space remain expensive. Stock selection will be important."
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His strategic outlook encapsulates the current situation: "The first half of the year was largely driven by large-cap resilience. But the broader market is now gaining traction. With improving macros, better earnings, and steady inflows, the second half could offer opportunities — especially in sectors linked to India's growth story."
Whilst conditions appear favourable for small-cap growth, success will depend on careful analysis and selective investment choices.
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