Weak Q1 Earnings Spark Caution for Small Cap Investors

Recently, first-quarter (Q1) earnings have delivered a blow to small cap investors. A report by Motilal Oswal revealed that small cap companies recorded an 11% earnings decline year-on-year, with nearly half failing to meet market expectations.

Key sectors such as private banks, lending firms, insurance, oil & gas and automobiles were among the hardest hit, sparking caution among investors who had been betting on smaller companies for higher returns.

Midcaps Stand Out with Strong Growth

The small caps struggled while midcap companies gave an impressive 24% growth in earnings compared to last year, consistently beating expectations.

The strong performance was led by sectors like oil & gas, public sector banks, lending firms, metals and IT. Analysts said “Sector growth momentum has made mid cap an increasingly attractive investment option, balancing both stability and growth potential”.

Broader Market Relies on a Few Giants

The broader market, shown by the Nifty index, managed modest single-digit growth in Q1. However, much of this was driven by giant companies such as Reliance Industries, Bharti Airtel and leading banks. 

At the same time, companies like Coal India and Tata Motors underperformed, so it dragged overall earnings & exposed the uneven nature of market growth.

Must Read: 3 Buy Recommendations by Motilal Oswal With Up to 22% Gains

Experts Recommend Portfolio Shifts

Based on the weak small-cap earnings, market experts suggest caution. Many analysts recommend shifting toward large cap and mid cap stocks, which are showing stronger fundamentals and better near-term prospects.

According to Hiren Ved of Alchemy Capital, the second half of FY25 could bring a turnaround, supported by GST reforms, better monsoons and a pickup in consumer spending around Diwali. This outlook particularly favours sectors such as automobiles, cement and consumer goods. 

Valuations Remain Attractive, Outlook Improves

Even with the weak start, valuations across Indian equities remain reasonable and the pace of earnings downgrades has slowed. Global brokerages, including Jefferies & Emkay Global, highlight GST reforms as a potential game-changer, expected to drive demand and strengthen earnings in the upcoming quarters.

For now, experts advise investors to shift to large cap and mid cap opportunities in banking, consumer goods and healthcare, while keeping an eye on small caps for a possible rebound later in the year. The near-term suggests that it may give confidence if reforms, demand recovery and festive-season spending play out as expected.