Mid-Cap and Small-Cap Stocks Face Early Setbacks in 2025: Will the Growth Story Continue?

Mid-cap and small-cap stocks have long been favorites among investors due to their high return potential. However, the beginning of 2025 has presented a shift in this narrative. Both the Nifty Midcap and Smallcap indices have seen declines of over 2% each in the first six sessions of the year, in stark contrast to the relatively modest 0.2% drop in the benchmark Nifty 50 index.
Despite this sluggish start, the past year showcased the resilience of mid-cap and small-cap stocks, with both indices outpacing the benchmark Nifty. Over the last 12 months, the Nifty Midcap and Smallcap indices posted impressive gains of over 25%, significantly outperforming the Nifty’s 9.6% rise. However, with analysts now sounding a note of caution, the big question remains: will mid and small-caps continue their strong performance, or is a period of consolidation on the horizon for 2025?
Performance Overview and Market Challenges
The stellar performance of mid-cap and small-cap stocks in recent years has been fueled by strong earnings growth and heightened investor interest. For example, in 2024, the Nifty Midcap 100 and Nifty Smallcap 100 indices surged by 28% and 29%, respectively, far outpacing the Nifty 50’s 13% rise. In 2023, mid-cap and small-cap stocks delivered even stronger returns, rising by 32% and 35%, respectively, compared to the Nifty’s 18% gain.
Yet, as we move into 2025, several challenges are emerging. Analysts have identified potential headwinds for mid and small-cap stocks, including increased regulatory scrutiny, tightening monetary policies, and a possible slowdown in earnings growth. These factors could dampen the ability of these segments to sustain their outperformance in the coming year.
Broader Market Outlook
Trivesh D, COO of Tradejini, acknowledged the important role mid-cap and small-cap stocks have played in recent market performance but warned that the dynamics could shift in 2025. “With heightened regulatory scrutiny and slower earnings growth, mid and small-caps may underperform or, at best, mirror the broader market indices this year. Investors should exercise caution and focus on quality stocks with solid fundamentals,” he advises.
Dr. Ravi Singh, SVP of Retail Research at Religare Broking, also shared a cautious outlook for the near term, expecting subdued market conditions until mid-January. However, he noted that positive momentum might emerge closer to the Union Budget announcement. “After January 15, mid-cap and small-cap stocks could see some outperformance, but significant gains are unlikely before this period,” he remarked.
Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities, predicts that the first half of the year will be more volatile, with returns expected to be backloaded in the latter half. “The first half of 2025 is likely to be more volatile, and consolidation in the market seems inevitable in the near term. The breadth of the market may narrow further,” he explained.