Smallcap Correction Deepens: Valuation Froth in Focus for 2026

• Small-cap stocks are experiencing a significant correction in early 2026, with nearly half the universe down over 10%.
• Despite the correction, valuation metrics like trailing P/E ratios for Nifty Smallcap 100 and BSE SmallCap index remain high compared to historical levels.
• Fund managers and analysts, including Nikunj Saraf of Choice Wealth and Nitin Bhasin of Ambit, highlight that valuations are still elevated, and downside risks are underappreciated.
• Weak earnings momentum for FY26 and subdued expectations for FY27 are central issues, making small caps unattractive at a broad market-cap level, according to Rishi Kohli of JioBlackRock.
• ICICI Prudential Mutual Fund has reopened subscriptions for its small-cap fund, citing moderation in valuations due to sustained underperformance, though concerns about earnings and liquidity persist.

Why It Matters: Small-cap correction deepens in 2026, exposing high valuations and weak earnings, shifting investor sentiment.