Midcap Stocks Surge Amid Ongoing Geopolitical Tensions: An Analysis of Market Trends

Midcap Stocks Trend Upward, Reaching New Highs

The Nifty Midcap 100 Index has reached new highs, signaling a potential multiyear breakout following a 20-month consolidation period that started in September 2024. The key reasons behind this trend include premium valuation, a decline in corporate earnings, foreign institutional investors (FIIs) selling, hawkish monetary policy, and rising geopolitical risk. However, in May, FIIs significantly reduced their selling activity, and for the first time, domestic institutional investors (DIIs) buying has more than offset overall selling pressure.

Market Outlook Points to Sustained Interest

Market outlook now points to sustained interest from mutual funds and retail investors into 2026, supported by easing crude oil prices and solid consumer confidence. This is evident from steady volume demand in Q4FY26 corporate earnings and consistent monthly GST inflows, which reached a net of 2.1 lac crores in April. However, several factors could pose challenges ahead, including heatwaves, weak monsoons, lingering effects of high crude prices on corporate earnings, geopolitical tensions, tight monetary policy, and ongoing inflationary pressures both globally and domestically.

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Cautionary Note on FIIs' Selling Activity

Despite current challenges, the outlook remains cautiously optimistic. If the trend of FIIs selling in India reverses in the coming years, the resulting upside could be substantial; otherwise, returns may remain moderate. It is premature to draw definitive conclusions regarding FIIs' short to medium-term perspective on India, as they have continued purchasing assets in other Asian markets while divesting in India.

Crude Oil Prices and Its Impact on India

The recent reversal observed in May largely stems from a significant decline in crude oil prices toward $100 per barrel. The prospect of peace in the Hormuz region may further support lower crude prices, which would be highly beneficial for India given its reliance on imports for 90% of its crude requirements. However, there are still risks—even if crude prices fall below $85, the incremental impact may be negative for India compared to FY26 average price of ~$70 per barrel.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

State and Union Elections and Retail Fuel Prices

Following the recent state and union elections in India, markets are speculating on a possible increase in retail fuel prices amid a sharp rise in crude oil prices on a YoY basis of 60%. Concurrently, it is anticipated that increased central government spending and state policy reforms in the eastern regions, particularly West Bengal, could drive prosperity among listed companies and major business players in the area.

Midcap Performance and Valuations

Other reasons for midcap performance include stronger-than-expected corporate results for Q4FY26, technical recovery from oversold territory, and lower valuations. The one-year forward price-to-earnings ratio for midcaps has fallen below the five-year average of 26x, encouraging the ongoing upside. However, the recent rally has again elevated India's midcap valuations relative to large caps, with the premium exceeding 50%.

Author's Note

The author, Vinod Nair, is the Head of Research at Geojit Investments Limited.