Stock market selloff: Why Sensex, Nifty, midcap, smallcap stocks may fall further

While the benchmark stock market indices Sensex and Nifty have continued to fall for the fourth straight day on Monday, smallcap and midcap stocks have seen a bloodbath, sending shivers down retail investors’ spine. A strong dollar, foreign outflows, Trump policies, poor earning projections are all making analysts believe largecap indices Sensex and Nifty may stay weak in the short-term. They do not rule out sharper cuts in many ‘narrative’ stocks from midcap smallcap pockets.

“In our view, large-cap. stocks may hold up better in the next few months while midcap, small-cap and ‘narrative’ stocks will see further severe correction if the alignment to fundamentals and value were to continue. There is no reason to expect otherwise. FPIs are unlikely to look at India favorably in a hurry (no new money for EMs, continued redemptions, high valuations) and retail investors would increasingly contend with dwindling trailing returns,” Kotak Institutional Equities said.

On Monday, the BSE Sensex was trading at 76,444.80, down 934.11 points or 1.21 per cent. Nifty at 23,104, down 327.50 points or 1.4 per cent. Midcap and Smallcap indices plunged 4 per cent each.

Data showed the BSE Smallcap index and the BSE Midcap index are now down 13-14 per cent from their one-year high levels. Sensex is down 11 per cent from its 52-week high. 

Amnish Aggarwal, Director, Institutional Research at Prabhudas Lilladher said Nifty has entered a downgrade cycle since Q1FY25 with successive cuts EPS estimates. 

It said the stock market is adjusting to the reality of slowdown in economy triggered by a decline in government capex during 1H25 and tepid consumer demand triggered by prolonged rains and sharp spike in food inflation to 10.9 per cent by October 2024. Add to that a rising probability of cash dole outs and election freebies is crowding out capex and casting shadow on overall fiscal discipline in the country. 

“Reduction of gap between 10-year G-sec and US treasury by 140bps has added to currency volatility with lower elbow room for RBI to cut interest rates aggressively. We Believe upcoming budget and Trump 2.0 hold key to market returns. While GOI might miss out on revenue collection, lower capex will help sustain fiscal discipline in FY25. We expect a growth-oriented budget with an attempt to pump prime the economy and incentivize the middle class to increase spending,” Aggarwal said.

Emkay Global said it sees the stock market to remain weak in Q1CY25, but stabilise from Q2 onwards, with earnings outlook improving and the FPI selling abating by then. “Consumption should bounce back from 2HCY25, and we adjust our sector positioning accordingly. Our Nifty target remains unchanged at 25,000, and we expect SMIDs to outperform,” it said. 

Prabhudas Lilladher has a base case target of 27,172 for Nifty, down from 27,381.