Market Bottom Near? Small Caps and Midcaps Signal Early Recovery

Anil Rego, the Founder and Fund Manager at Right Horizons PMS, observes clear signs of the market moving toward a bottoming-out phase, particularly in the broader market. After a meaningful correction, small and midcaps are now showing stronger recovery compared to large caps, which indicates improving investor confidence.

According to Rego, corporate earnings remain resilient. Historically, when earnings continue to stay ahead of prices and corrections are driven more by sentiment than fundamentals, such phases often mark the formation of a market bottom rather than the beginning of a deeper or prolonged downturn.

When asked about the BFSI sector, Rego believes it is well positioned to lead the market recovery once geopolitical uncertainties ease. Early Q4FY26 results already support this view, with BFSI emerging as the strongest earnings driver. Banking fundamentals remain strong, with system credit growth improving to 14.6 percent YoY, stable asset quality, and declining credit costs. The transition to the ECL framework could create a near-term overhang for the BFSI sector, especially for PSU banks. However, as oil prices stabilize and risk sentiment improves, lower funding pressures and better liquidity conditions can further support valuations, making BFSI the natural leader of the broader market recovery.

Rego also notes that there are clear signs that the market is moving toward a bottoming-out phase, particularly in the broader market. Small and midcaps have undergone a meaningful correction and are now showing stronger recovery compared to large caps, indicating improving investor confidence. Investors are gradually moving back toward growth-oriented segments where earnings visibility remains strong and valuations have become more attractive after the correction.

Domestic liquidity continues to provide strong support through consistent SIP inflows and steady DII participation, helping absorb volatility caused by foreign outflows. Corporate earnings remain resilient, which historically suggests that such phases often mark the formation of a market bottom rather than the beginning of a deeper or prolonged downturn.

For long-term investors, the current market offers a good entry point, especially after the meaningful correction seen across broader markets over the past several months. Valuations in small and midcaps have become far more reasonable, while earnings growth remains strong, creating a better risk-reward setup. The recent recovery in broader markets suggests investors are gradually returning to growth-oriented businesses where fundamentals remain intact. Instead of aggressive lump-sum deployment, phased allocation is more prudent. Investors should focus on quality businesses with earnings visibility and reasonable valuations, as long-term wealth creation comes from strong businesses rather than short-term market timing.

Regarding real estate stocks, the sector still benefits from strong domestic institutional participation, steady office demand, and investor preference for stable yield-generating assets such as commercial real estate and REIT-linked opportunities. Domestic capital has increasingly become the primary support for the sector, reducing reliance on foreign inflows and helping maintain project execution even during global uncertainty. However, some caution is necessary. Foreign investments have slowed due to geopolitical tensions and global risk aversion, which can impact sentiment and funding visibility. Additionally, weaker hiring trends and uncertainty in the IT sector, particularly in cities like Bengaluru, Pune, and Hyderabad, may affect residential demand, especially in premium housing segments driven by salaried professionals. This could lead to slower sales and higher inventory levels. Therefore, investors should focus on quality developers with strong balance sheets, execution strength, and diversified demand exposure rather than taking a broad sector call.

Rego believes that oil prices are likely to remain elevated during the first half of FY27 due to continued geopolitical tensions in the Middle East, particularly around the Strait of Hormuz. Any disruption or prolonged uncertainty in this region tends to keep a geopolitical premium embedded in crude prices, while supply-side concerns and OPEC+ production discipline also support higher prices in the near term. However, in the second half of FY27, prices could gradually stabilize in the $75–85 per barrel range if geopolitical tensions ease, supply normalizes, and global demand growth moderates. A sustained move above $100 would be a concern for India, as it would pressure inflation, widen the current account deficit, and weigh on the rupee. For equities, particularly sectors like FMCG, autos, paints, and aviation, stable oil prices would improve margin visibility, while elevated prices would continue to create earnings pressure and keep market sentiment cautious.

Despite geopolitical tensions, FY27 earnings growth exceeding 10% still appears achievable, provided the disruption remains temporary and crude prices do not stay elevated above $100 per barrel for a prolonged period. The economy is reflating, and domestic demand is improving, supported by policy stimulus and earnings revival across sectors. Consensus also expects earnings to rise meaningfully over FY26–28, with stronger support from domestic-facing sectors.