HFCL has surged 56% since the war began, leading all smallcap gainers. Gallant Ispat is up over 51%. Welspun Corp, Ola Electric, Cohance Lifesciences, Aditya Infotec, Angel One, Onesource Specialty Pharma and Emmvee Photovoltaic Power have each gained between 35% and 47% in the same window. In the midcap space, Lloyds Metals & Energy, Premier Energies, OFSS, Suzlon Energy, Thermax, NTPC Green Energy, BHEL, Groww and BSE are all up at least 30%.
The euphoria, however, is drawing sharp warnings from institutional desks.
Also Read | Most hated stocks: FIIs dumping these 146 companies without a break for 4 straight quarters. Do you own any?
Emkay Global’s head of research Seshadri Sen is sounding the alarm most directly. “We turn cautious on markets after the Nifty rally from the 2-Apr lows,” Sen wrote in a note to clients.
“The Middle-East conflict remains in limbo, and an agreement to open the Strait of Hormuz remains elusive, despite cessation in hostilities.” With Brent crude hovering near $100 per barrel, Sen says a 10% hike in retail petrol and diesel prices “now looks likely” absent a breakthrough on the Hormuz impasse — a catalyst that could trigger a near-term market correction.
He added that the market has “lost its valuation support, trading near long-term average at 19x,” and flagged that the first quarter of FY27 is already off to a weak start, with roughly 7% of Emkay’s coverage universe missing forecasts so far.
Market rallying amid downgrades
JP Morgan has gone further, downgrading Indian equities to Neutral. “Already bruised by a dismal 2025, the Nifty 50 could be headed for another challenging year,” the bank’s strategists wrote, citing elevated valuations, earnings risk, dilution pressures and limited exposure to next-generation technology. India’s premium to the MSCI Emerging Markets index has compressed to 65% from a peak of 109%, but peers like Korea, Brazil and China “still offer cheaper entry points for similar or better forward growth,” the bank noted.
JP Morgan’s sector analysts have already cut FY27 earnings estimates by 2–10% across key sectors. The bank’s year-end targets for the Nifty 50 now stand at 30,000 for the bull case, 27,000 for the base case and 20,500 for the bear case.
“Given India’s reliance on imported energy and the potential knock-on effects on inflation and domestic demand, we are concerned about the durability of the ongoing earnings recovery,” HSBC strategists wrote, adding that they expect consensus forecasts, currently pricing in 16% year-on-year earnings growth for 2026, to be revised down in the coming months. “While valuations have corrected materially from their peak, they will appear elevated as earning downgrades feed through,” HSBC added, concluding that India “looks less attractive than its North East Asian peers in the current macro environment.”
Also Read | Nifty bears regret not buying the dip. Will Trump hand them a second chance?
Nuvama offers perhaps the most granular bear case on the SMID rally specifically. The brokerage warns that mid and smallcap valuations remain more than one standard deviation above historical averages across metrics, and that the sharp earnings rebound the market is pricing — a 22% profit CAGR for FY26–28, against just 12% in the prior two years — is unlikely to materialise.
“A sharp rebound a la Covid-19 or the Russia-Ukraine war is unlikely as large global stimulus or unlocking pent-up demand is missing,” Nuvama’s strategists wrote. Household, corporate and government incomes are all under pressure, capex is being pruned, and credit recovery is being led by gold and MSME loans — “substitutes for weak income,” the brokerage notes, “and thus not increasing activity.”
Bracing for an earnings downgrade, Nuvama expects small and midcaps to remain range-bound until fresh stimulus arrives or valuations turn genuinely cheap.
For now, domestic retail flows and easy liquidity are keeping the smallcap party alive. But with crude above $100, a potential fuel price hike on the horizon, and brokerages turning cautious, the divergence between smallcap exuberance and large-cap reality is unlikely to hold indefinitely.
(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
