Small-Cap Stocks Lead Gains in H1 FY27 Amid Market Shifts

In the first half of fiscal year 2027, small-cap stocks delivered the strongest returns among major asset categories, with the Nifty Smallcap 250 index climbing 23% from April through September. This impressive growth outpaced midcap stocks, represented by the Nifty Midcap 150, which rose 13%, and large-cap stocks in the Nifty 50, which gained just 2% during the same timeframe.

This notable shift marks a reversal from the previous fiscal year when precious metals like gold and silver dominated performance charts. Gold fell by 10% and silver by 15% in H1 FY27, contrasting with their 23% and 36% gains respectively in the first half of FY26. The pivot toward small caps reflects investors’ renewed appetite for higher-risk, higher-reward segments amid improving earnings and liquidity conditions.

However, market analysts caution that the small-cap rally has become increasingly concentrated and stretched. Data shows nearly half of the Nifty Smallcap 250 constituents reached 52-week highs within the period, with over half of those peaks occurring in August and September alone. The index’s price-to-earnings ratio now stands at 34 times earnings, approximately 25% higher than its five-year average of 27 times. This elevated valuation suggests that any earnings shortfall could lead to volatility.

The midcap segment displayed more mixed signals. While about half of the Nifty Midcap 150 stocks also hit 52-week highs in H1 FY27, 40% simultaneously recorded 52-week lows. This broader correction, along with the midcap index trading 8% below its five-year average P/E ratio, indicates relatively lower valuation pressure compared to small caps.

Experts attribute the outperformance of small- and mid-cap companies to their resilience amid global uncertainties. Sanjit Singh Paul, smallcase manager and managing partner at Modulor Capital, highlighted that earnings for several firms improved year-over-year in the June quarter, defying earlier expectations. He noted that the US’s reciprocal tariff, which had imposed an 18% levy, has been adjusted with exemptions and differentiated rates benefiting Indian exporters in sectors such as generic pharmaceuticals, electronics, specialized engineering, and specialty chemicals.

N. ArunaGiri, CEO of TrustLine Holdings, added that market leaders in the small- and mid-cap space possess diversified customer bases, stronger pricing power, and healthy free cash flows. These qualities help them withstand external shocks, such as the ongoing conflict in West Asia, and maintain their long-term growth trajectories.

Liquidity has further propelled the rally. In August alone, small- and mid-cap mutual fund schemes accounted for nearly half of the ₹29,328 crore net equity inflows, with small-cap funds attracting ₹7,973 crore and mid-cap funds ₹6,989 crore. These figures represent the strongest monthly inflows for these segments in two years. Paul expects this trend to continue unless the broader market experiences a sharp downturn. Still, he warns that elevated crude oil prices could squeeze profit margins in the December quarter, especially for industries like apparel, home textiles, leather, and footwear, which are more vulnerable to global disruptions.

The changing macroeconomic environment has also affected commodities. The West Asia conflict has pushed Brent crude prices to an average of about $92 per barrel in H1 FY27, a 35% increase compared to the $67 average in H1 FY26. This rise contributed to the US Federal Reserve’s decision to raise interest rates by 25 basis points in September, pushing the 10-year Treasury yield to 5.2%, its highest in 19 years. Higher yields increase the opportunity cost of holding non-yielding assets, such as gold and silver, which partly explains their decline in value during this period.

Navneet Damani, head of commodities research at Motilal Oswal Financial Services, notes that although central bank purchases, geopolitical tensions, and inflation hedging provided some support for precious metals, rising real interest rates and weaker demand have dampened their momentum compared to last year. He remains cautiously optimistic about gold and silver, suggesting gains will continue but at a slower pace.

This article is part two of a five-part series reviewing the performance of various economic sectors in the first half of fiscal year 2027. The initial installment examined the domestic markets, while upcoming articles will explore private consumption and other key themes.

About the Author
Abhinaba Saha specializes in in-depth financial reporting covering markets, corporate developments, and economic trends. Holding a finance postgraduate degree from King’s College London, he shifted to journalism three years ago to make finance accessible to a broad audience. His work spans multiple sectors and asset classes, including IPOs, commodities, and public and private markets. Abhinaba also creates concise video explainers for Mint’s YouTube channel. Outside of work, he enjoys cycling through Mumbai's Bandra neighborhood and practicing yoga as a way to find balance amid market fluctuations.