Rs 7 lakh crore boom in just 10 days! Is the smallcap stocks party getting out of hand?

Time of India

26-05-2025

Smallcap stocks have surged, adding Rs 7.3 lakh crore to investor wealth in just 10 sessions, fueled by stock-specific triggers and retail investor enthusiasm. While some experts see justified valuations due to growth, others caution against stretched valuations and potential herd behavior, highlighting the risks of chasing momentum after a prior correction. The rally's sustainability remains questionable.
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As small is turning out to be beautiful once again, smallcap stocks have added a jaw-dropping Rs 7.3 lakh crore to investor wealth in just 10 trading sessions — a 10% surge in the BSE SmallCap index that has caught both retail and institutional investors off guard. The sharp rally, led by explosive moves in names like Nelcast and Cosmo First (both up 65%) and GRSE (up 55%), has sparked fresh debate: is this a sustainable rebound or another round of frothy FOMO?A total of 46 stocks have surged at least 30% in the last 10 days, with names such as TTML Angel One and Titagarh Rail among the standout performers. The breadth of the rally has been remarkable — out of nearly 980 stocks in the BSE SmallCap index, fewer than 70 have delivered negative returns during this period.The rally, while widespread, has been driven by a combination of stock-specific triggers, sectoral tailwinds, particularly in defence and railways, and liquidity-led buying from retail investors eager to ride the next big wave.'The recent ferocious rally in defence stocks post the recent skirmish (Operation Sindoor) is yet another example of greed or FOMO taking over rational investing behaviour,' said Atul Bhole, EVP & Fund Manager at Kotak Mahindra AMC. He noted that several small and midcap (SMID) stocks had earlier suffered value erosion of 40-60% between mid-2024 and early 2025, largely due to momentum-driven buying without fundamental backing.Bhole warns that while mutual funds and institutional investors have sidestepped many of these traps, retail participants may not have learned their lesson: 'The market is like a voting machine in the short term and keeps attracting new investors or making the same investors repeat newer mistakes.'Dhiraj Relli, MD & CEO of HDFC Securities, said the rally comes on the heels of a brutal correction: 'Midcap and small cap indices corrected 20-22% earlier this year, with many stocks falling 25-40%, which made valuations more attractive.' Sectors like railways, defence, and metals have since staged sharp rebounds.Still, Relli cautioned that investors chasing momentum need to tread carefully. 'Valuations in several segments have again become expensive. While smallcaps offer high return potential, they also come with high risk.'Rupak De, Senior Technical Analyst at LKP Securities, argued the current rally might be masking deeper issues. 'Many broader market stocks continue to look vulnerable to selling pressure. A handful of quality names are pulling up the smallcap and midcap indices, creating the illusion of broad strength.'He emphasized that this isn't 2023 anymore: 'This time around, the market will truly test your stock-picking skills.'Despite concerns, some strategists see merit in the rally. Seshadri Sen of Emkay Global noted that high valuations in the SMID space may not be as alarming as they appear. 'We do not see any bubble in SMIDs. High valuations are supported by growth and improved earnings quality,' he said. Sector composition differences between large caps and small/midcaps, he argues, explain much of the divergence in price-to-earnings ratios.Yet, not everyone is buying the optimism.Kotak Equities flagged that 30% of new mutual fund investors have entered the markets in the past two years, with disproportionate flows into midcap, smallcap, and thematic funds — a pattern that raises red flags around sustainability. Many of these investors are still heavily invested in 'narrative' stocks, despite last year's harsh correction.The Rs 7.3 lakh crore question is not whether smallcaps can rally but whether this rally is built on solid ground or destined to unravel under the weight of stretched valuations and herd behaviour. For now, momentum is in control — but fundamentals may soon have their say.(Data: Ritesh Presswala): Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)