Indian stock market: Mid-cap magic drives index 20% higher in just 4 months. Will this breakneck rally extend or end?

Mid-cap stocks outlook: Buoyed by improving investor sentiment and a renewed appetite for risk, mid-cap stocks have taken centre stage on Dalal Street. The Nifty Midcap 100 index has surged nearly 20% over the past four months, driven by strong earnings growth and a shift in market leadership.
Q4 FY25 marked a clear turning point, with mid-caps outshining both large and small-caps on the earnings front. The Motilal Oswal Midcap universe reported 19% YoY PAT growth—nearly double that of large-caps and well ahead of small-caps.
Amid a volatile start to the year, amid tariff uncertainty, foreign investor outflows, and broader economic concerns, the Nifty Midcap 100 is just 1% higher YTD, yet, within the index, select stocks have soared up to 75% in 2025—led by defence counters.
Top gainers include Solar Industries, Bharat Dynamics, Mazagon Dock, and Cochin Shipyard, with support from BSE, SBI Cards, and Aditya Birla Capital, reflecting broad-based participation across sectors.
This rally also coincides with the return of foreign institutional investor (FII) inflows, totalling ₹ 11,544 crore, alongside 23 consecutive months of domestic institutional investor (DII) buying.
"Overall domestic flows have been strong in June and 2025. In June, around ₹ 50,000 crore of stocks have been bought by DIIs, and the trend has remained the same for 2025 as well. Out of this, 34-40% of the flows have gone into mid-cap stocks," said Vaqarjaved Khan, Sr. Fundamental Analyst, Angel One Ltd, pegging it as one of the key reasons behind the rise in mid-cap stocks.
Encouraging Q4 earnings results from several companies, particularly in the mid-cap space, have boosted investor confidence and driven buying interest, opined Avinash Pathak, Analyst at LKP Securities.
According to a Motilal Oswal report, the midcap space saw a favourable upgrade cycle this quarter, reversing the downgrade-heavy trend seen in the past three quarters, signalling improved earnings visibility and greater investor confidence. A healthy Indian economy and RBI rate cut are among other factors that Pathak believes lend support to the mid-caps.
With many factors aligning for the rally in mid-cap stocks, the key question remains how long this trend will sustain, as valuations are becoming stretched following such a sharp rise.
The Nifty Midcap 100 index, at around 29.3x FY26 estimated earnings, is trading at a premium to its 10-year average. This raises concerns about overvaluation in certain pockets, especially if earnings growth doesn't keep pace, said LKP Securities' Pathak. He added that we have already seen instances of profit booking in small and mid-cap stocks after multi-day rallies, suggesting that investors are becoming watchful of valuations.
Even today (June 19), the Nifty Mid-cap 100 is down for the third day, underperforming the benchmark, as the Iran-Israel conflict hammers sentiment.
"The sustainability will largely depend on continued strong earnings growth and margin stability for mid-cap companies. Any disruption in global demand or resetting of cost bases could impact this," Pathak opined. He advised focusing on fundamentally strong mid-cap companies with good earnings visibility, lower debt, and sectoral tailwinds, which will be crucial rather than a broad-based approach.
As per ICICIDirect, Nifty midcap is undergoing a healthy retracement after a 28% rally, which should be used as a buying opportunity based on a few factors.
"Since the April low, the midcap index has not corrected >6% while on the weekly chart it has not closed below its previous week's low. In the current scenario, despite ongoing volatility, the midcap index has been maintaining the same rhythm. Further, the ratio chart of Nifty 500/Nifty 100 has been inching upward, which indicates relative outperformance," the brokerage said.
Motilal Oswal also believes that midcaps are no longer just a beta play—they are increasingly becoming alpha generators. Their ability to adapt, diversify, and scale across core economic themes like electrification, infrastructure, and financial inclusion reinforces their relevance in long-term portfolios, it added.
Angel One's Vaqarjaved Khan recommended being watchful and selective. "Over the next one year, the outperformance can continue if global macro holds stable, corporate earnings delivery happens, and Government spending momentum continues. Avoid stocks that have stretched valuations compared to their historical averages and peers," Khan added.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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