At first glance, the Indian stock market looked strong in 2025. Major indices like Sensex, Nifty and Bank Nifty hovered near record levels or touched lifetime highs. This strength in headline indices gave the impression that the market was in a solid uptrend. However, when investors looked at their portfolios, many stocks were still marked in red.
Largecap stocks pulled the market higher, while midcap and smallcap segments remained under pressure. This is why a clear gap emerged between index-level gains and the weakness seen in most stocks. Let’s understand what is really going on through data.
What’s Happening?
The beginning of December 2025 was historic for the Indian stock market. On December 1, 2025, the BSE Sensex recorded its highest-ever closing level at 86,159.02, crossing its previous record of 85,978 set in 2024. Similarly, the Nifty 50 climbed to 26,325.80 on December 1, 2025, surpassing its earlier all-time high of 26,277.35 from September 2024. These numbers clearly show that headline indices reached new peaks.
However, the rally in 2025 was highly selective. Gains were limited to a handful of stocks, while the broader market stayed under pressure. Nearly 90% of listed stocks were still trading well below their respective 52-week highs. This trend was visible despite government support such as income tax and GST cuts, along with strong domestic investment flows. In simple terms, the index strength did not reflect broad market participation, as the rally remained confined to a few stocks.
Why did smallcap and midcap stocks weaken?
The weak performance of smallcap and midcap indices in 2025 was largely part of market normalisation after a strong rally over the previous two years. In 2024, the BSE Smallcap index delivered returns of over 29%, while the Midcap index gained around 26%, significantly outperforming the Sensex. Such sharp rallies pushed valuations of many small companies to very high levels, without a matching rise in earnings.
In 2025, this imbalance began to correct. Amid global uncertainty, investors shifted their focus toward largecap companies with strong balance sheets and stable earnings visibility. On the other hand, smallcap and midcap companies are more sensitive to funding costs, margin pressures, and economic slowdowns, which increased volatility in these segments. As a result, investor money rotated toward blue-chip stocks, leaving small and midcap stocks lagging behind.
Largecap vs smallcap: a clear divide
While Sensex and Nifty touched new highs, the broader market told a very different story. Smallcap and midcap indices, which performed exceptionally well in 2023 and 2024, struggled in 2025. As of December 24, 2025, the BSE Smallcap index had fallen by 3,686.98 points, a decline of 6.68%, and even touched its 52-week low of 41,013.68.
Meanwhile, the BSE Midcap index showed muted performance, rising by just 360.25 points, or 0.77%. This was a sharp contrast to 2023, when smallcap stocks rallied over 47% and midcaps gained more than 45%. Analysts describe the weak 2025 performance as part of a broader market normalisation phase.
What Does This Mean for Investors?
The current market setup calls for caution. Even though Nifty is near record levels, market breadth remains weak. According to reports, despite the rally, 9 out of 10 stocks are still trading in the red. This clearly indicates that index gains are not translating into gains across the broader market.
That said, after the correction seen in 2025, valuations of quality smallcap and midcap stocks have become more reasonable compared to their peak levels. However, without a meaningful improvement in earnings, a broad-based rally looks unlikely. The next phase of the market is expected to be driven more by fundamentals than liquidity.
What’s Next?
Looking toward 2026, the direction of the stock market will depend on a few key factors. According to Business Standard, corporate earnings are expected to be the biggest driver of market performance. If earnings show stable and broad-based improvement, the market could get a strong foundation.
Apart from this, policy decisions in the Union Budget especially those related to capex, taxation, and growth support will shape investor sentiment. Foreign institutional investor (FII) flows will also play a crucial role, as changes in global interest rates and risk appetite directly impact Indian markets.
Overall, the next market rally in 2026 is likely to be driven more by earnings, policy support, and global cues rather than excess liquidity.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
