Retail favourite small-cap stocks lead the charge in latest stock market rally. Is now the time to invest more?

Small-cap stocks in focus: Small-cap stocks are currently at the forefront of the Indian stock market’s latest bull run, which resumed this week following a double boost — the Indo-Pakistan ceasefire and an easing of tensions in the US-China tariff conflict.

Retail investors’ favourite segment has historically outperformed both mid- and large-cap stocks during sustained rallies. The segment, which faced a severe beating between October and February due to concerns over expensive valuations, has seen a sharp recovery in the last two months amid improved March quarter performance and expectations of an earnings revival in the current fiscal year.

Even though valuations for some counters — especially in the defence sector—remain elevated, they continue to attract strong buying interest from Dalal Street investors. This follows the recent display of India’s indigenously developed defence systems against an adversary last week, boosting sentiment that the country may increase its defence spending further.

Amid the strong rally in defence counters, the Nifty Smallcap 100 index has gained 7% so far this week, outperforming both the Nifty Midcap 100 index, which rose 6%, and the benchmark indices — Nifty 50 and Sensex — which gained nearly 3% during the same period.

Apart from the easing geopolitical and global trade tensions, sustained foreign institutional inflows and record GST collections in April have also signalled strong underlying economic resilience.

In addition, the progress in the India–UK Free Trade Agreement lifted market optimism, driving gains across key sectors such as textiles, automobiles, and information technology.

Defence, rail stocks ride the small-cap wave

In terms of individual stocks, Garden Reach Shipbuilders emerged as the top gainer this week, rising 27% and marking its biggest weekly gain since mid-March. The rally also pushed the stock to an 8-month high of ₹2,340 apiece.

Likewise, Zen Technologies and Data Patterns (India) have jumped 21% and 14%, respectively, this week. Railway stocks have also joined the defence rally, with names like RailTel Corporation, HBL Engineering, Titagarh Rail Systems, and Ircon International rising up to 23% over the last four trading sessions (including today).

Mid- and small-cap momentum is likely to sustain, say experts

Vinod Nair, Head of Research at Geojit Financial Services, said, "Market optimism is gaining momentum, driven by a sharp decline in both global and domestic risks. In this environment, the broader markets are on an upswing, supported by a strengthening recovery in local demand, as reflected in the March quarter corporate earnings."

He believes this has sparked a rally in mid- and small-cap stocks, which had previously underperformed due to premium valuations, earnings downgrades, and a moderation in foreign institutional investor (FII) and retail inflows.

Currently, midcaps are witnessing renewed interest, fueled by marginal upgrades in recent earnings and the potential for a stronger rebound in FY26. Contributing factors include a consistent decline in inflation, rising disposable incomes, increased government spending, and falling interest rates.

"Meanwhile, a pause in global trade tensions is boosting sentiment in international markets, with metals gaining traction amid easing concerns over an economic slowdown," he further stated.

Dr VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said, "The sustained, robust FII buying that lifted the large caps is likely to weaken in the new context of a trade deal emerging between the US and China. The possibility of a ‘Sell India; Buy China’ tactical FII trade cannot be ruled out now. This will weigh on large caps and strengthen the case for further rally in mid- and small caps, despite the valuation concerns.”

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.