Can Market Selloff Continue in the Upcoming Times? Here's a look.

While the benchmark stock market indices, Sensex and Nifty, have continued their decline for the fourth consecutive day on Monday, smallcap and midcap stocks have experienced a sharp sell-off, unsettling retail investors. Analysts believe that factors such as a strong dollar, foreign outflows, Trump administration policies, and disappointing earnings projections could keep large-cap indices like Sensex and Nifty weak in the short term.

"In our view, large-cap. stocks may hold up better in the next few months while midcap, small-cap and ‘narrative’ stocks will see further severe correction if the alignment to fundamentals and value were to continue. There is no reason to expect otherwise. FPIs are unlikely to look at India favorably in a hurry (no new money for EMs, continued redemptions, high valuations) and retail investors would increasingly contend with dwindling trailing returns," Kotak Institutional Equities said.

On Monday, the BSE Sensex was at 76,444.80, losing 934.11 points or 1.21%. The Nifty stood at 23,104, down by 327.50 points or 1.4%. Both the Midcap and Smallcap indices saw a sharp decline of 4% each.

Data reveals that the BSE Smallcap and BSE Midcap indices have fallen by 13-14% from their one-year highs, while the Sensex is down 11% from its 52-week peak.

Amnish Aggarwal, Director of Institutional Research at Prabhudas Lilladher, stated that the Nifty has entered a downgrade cycle since Q1FY25, with consecutive reductions in EPS estimates.

He noted that the stock market is adjusting to the reality of an economic slowdown, driven by a decline in government capital expenditure during 1H25 and weak consumer demand due to prolonged rains and a sharp rise in food inflation, which reached 10.9% by October 2024. Additionally, the increasing likelihood of cash handouts and election-related freebies is crowding out capital expenditure and casting a shadow on the country’s overall fiscal discipline.

Aggarwal said, "Reduction of gap between 10-year G-sec and US treasury by 140bps has added to currency volatility with lower elbow room for RBI to cut interest rates aggressively. We Believe upcoming budget and Trump 2.0 hold key to market returns. While GOI might miss out on revenue collection, lower capex will help sustain fiscal discipline in FY25. We expect a growth-oriented budget with an attempt to pump prime the economy and incentivize the middle class to increase spending,"