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As the broader indices become volatile, and swing wildly each day, up and down a few thousand points, there is an exciting, but dangerous, sub-plot that is emerging in Indian equities. According to a recent report, even as main indices were down in March and April, and even before these months, the Nifty SmallCap 250 climbed by more than five per cent over the past two months.

This, according to the writer, highlights a “stunning decoupling that suggests domestic retail investors are betting that geopolitical storm will pass before it hits (corporate earnings).” The rise in some of the stocks are unbelievable, more than 50 per cent in two instances. Between 35 per cent and 50 per cent in seven cases, and around 30 per cent in another nine stocks.

Although most of these shares are in an obvious manner related to green energy, and renewables, there are some related to pharma, and even stock trading. Hence, they may have nothing to do with the expectations of when the war will end, and more with the implications after the war ends. Green energy is an obvious gainer. So is stock trading because investors wish to cherry pick at low prices.

According to some brokerage houses, since the large-caps and midcaps are beyond the reach of the small investors, even at highly-corrected prices, the enthusiasm is more focused on the small-caps. There is a belief that the future stock market trends will follow what happened during Covid.

After the deep crash in March 2020, stocks across the world rebounded as if there was no pandemic, or that the pandemic was a blessing in disguise for several firms across sectors. But analysts warn against such beliefs, which may not turn out to be true. “A sharp rebound a la Covid-19 or the Russia-Ukraine war is unlikely as large global stimulus or unlocking pent-up demand is missing,” says a brokerage house.

It adds that the incomes of individuals, firms, and nations are under pressure, investments are on hold or in decline, and credit is being shaped by gold and MSME loans. The last are merely “substitutes for weak income, and thus not increasing activity.” The pandemic unintendedly led to major cost cuts, partly due to the sackings and work-from-home, and the Russia-Ukraine war propelled Russia to push more oil into the market that subdued energy prices. This time, oil prices may remain high for months, even years.

At present, despite the net outflows by the foreign investors, there is substantial domestic money that is sloshing around, and looking for investment opportunities. Gold reached a peak, and its correction in January and March 2026 scared off investors, which is reflected in the quarterly demand for gold-backed exchange-traded funds (see the anchor article on this page).

Large-caps, though stable and safe, are too expensive, and the possible losses are higher if indices go down further. In such a scenario, where tech, IT, and software stocks are at new lows, the obvious targets are the small-caps. They are cheap, and because the liquidity is low, prices move up sharply due to small purchases. The excitement about green energy, amid global crude oil prices at $110 a barrel, encourage investors to seek small stocks in the sector.

But as brokerage houses issue warnings about indices and stocks, and some of them downgrade India as a nation, compared to the Asian and emerging market peers, investors need to be careful. When the markets go up, if they do in some months, the small stocks may be left behind. As the same article concludes, the “divergence between small-cap exuberance, and large-cap reality is unlikely to hold indefinitely.”

In technical terms, one can contend that it is a question of valuations. According to a brokerage house, the midcap and small-cap valuations “remain more than one standard deviation above historical averages across metrics, and that the sharp earnings rebound the market is pricing, a 22 per cent profit CAGR (compounded annual growth rate) for FY-26-28, against just 12 per cent in the prior two years, is unlikely to materialise.” In fact, some analysts feel that the markets have lost the “valuation support,” and the initial indications of the quarterly results in the forthcoming Q1-27 are “already off to a weak start, with roughly seven per cent of Emkay’s (a brokerage house) coverage universe missing forecasts so far.”

JP Morgan has slashed the FY-27 corporate earnings estimated by 2-10 per cent across sectors. The base case prediction for the Nifty 50 by the end of this year is 27,000, or 12.5 per cent up, with the bullish case at 30,000, or 25 per cent higher. Yet, there is the bearish case, which is at 20,000, 16 per cent lower. In such a scenario, two things can happen.

Realities may finally bite as mentioned earlier, and force investors to seek safety. In such a scenario, the large-caps, if they do not go up substantially, or are dragged down, will pull down the midcaps and small-caps with them. In contrast, investors will swarm the small-caps, and forget about the large-caps, which may result in another divergence. There will be an interplay between excitement, exuberance, and earnings.