Risk-on trade back? Smallcap stocks rally up to 28% in 2026, but market breadth stays weak

After a lacklustre 2025, smallcap stocks appear to be staging a comeback, supported by a mix of triggers including relatively comfortable valuations, improving earnings visibility and a return of the risk-on trade. The India-US trade deal, which weighed on markets last year and in the opening month of this year, is now emerging as a key sentiment booster, but market experts sound caution as the tariff-related threat is never off the hook with Donald Trump at the helm.

While the market breadth for smallcaps is still tilted towards the bears, stock-specific buying action is visible. An analysis of the Nifty Smallcap 250 index shows 31% (77) of the stocks trading in the green, managing up to 28% returns. Of these, 19 stocks have delivered double-digit returns.

Mangalore Refinery and Petrochemicals (MRPL) leads the pack with 28% and is followed by Aarti Industries and Karur Vysya Bank with returns of 26% and 24%, respectively.

The other top movers include IFCI, Syrma SGS Technology, Great Eastern Shipping Corporation, Vardhman Textiles, Angel One, Hindustan Copper, Shipping Corporation of India (SCI), The Ramco Cements, Emcure Pharmaceuticals, Jindal Saw, Navin Fluorine International, Bandhan Bank, Welspun Living, JK Tyre and Industries, Amber Enterprises and Chennai Petroleum Corporation. Their YTD returns are in the range of 22% to 10%.

Sunny Agrawal, Head, Retail Fundamental Desk at SBI Securities, said that the majority of the smallcap names are beaten down and have corrected to the tune of 30-40% during the last 15 months. "The recent recovery in smallcaps can be attributed to multiple factors like relatively better earnings growth coupled with comfortable valuations, return of risk-on trade on the back of the conclusion of multiple FTAs, especially the India-US trade deal, easing of tension between the US and Iran, oversold positioning and upbeat sentiments across Asian markets," Agrawal said.

The Nifty Smallcap 250 fell about 6% in 2025 as investors gravitated towards largecaps amid stretched smallcap valuations, earnings downgrades and delays around the trade deal. In contrast, the benchmark Nifty ended the year with gains of around 8%, while the Nifty Midcap 100 closed 2025 up nearly 6%, according to Trendlyne data.

The US-India trade deal has emerged as the biggest sentiment booster, lifting the Nifty Smallcap 250 by about 5% over the past week. Buying interest has returned across market capitalisations, with the benchmark Nifty gaining nearly 3% over the same period, Trendlyne data revealed.

Veteran investor Ashish Kacholia believes the prolonged and painful bear phase in smallcap stocks may finally be drawing to a close, following the India-US trade deal that has sparked a sharp relief rally across Indian financial markets.

In a recent social media post, Kacholia noted that the best buying opportunities often arise when investors are gripped by fear, suggesting that the trade deal announcement could prove to be a key inflection point for smallcaps. He added that the bear market in the segment appears to have ended with former US President Donald Trump’s tweet announcing the signing of the trade deal, signalling a sudden shift in sentiment after months of sustained selling pressure.

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Negative breadth intact
While the recent buying has been encouraging, the market breadth remains highly skewed in favour of bears. The extended correction since October 2024 has taken a toll on smallcap names.

Nearly 70% of stocks in the Nifty Smallcap 250 index are down 35% in 2026 so far, with over 30 stocks seeing prices wiped off in double digits.

Among the worst-hit stocks are OneSource Specialty (36%), Cohance Lifesciences (34%) and Five-Star Business Finance (19%).

Others like Signatureglobal (India), Reliance Power, Poly Medicure, HBL Engineering, NBCC (India), Deepak Fertilisers, Vedant Fashions, IIFL Finance, Aditya Birla Real Estate, KEC International, Radico Khaitan, Rainbow Childrens, Ola Electric Mobility, Jyoti CNC Automation and JM Financial are other stocks that have plunged up to 18%.

Outlook
Agrawal’s advice to investors is to remain cautious, as a secular rally will depend largely on sentiment around tariff-related developments. With Trump at the helm, the ride may not be smooth, he opined.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)