After a broad-based correction across Indian equities, early signals are emerging that could reshape market leadership in the next phase of the cycle. According to market veteran Sushil Kedia, founder of Kedianomics, small-cap stocks are beginning to show relative strength against large-cap indices, suggesting the possibility of a sharper rebound once markets stabilise.

The Indian equity market has undergone a meaningful drawdown in recent weeks, with benchmark indices falling roughly 15 percent from their peak levels. The correction has not been confined to a single segment. Banking stocks, both PSU and private, along with automobile companies, have witnessed declines in the range of 13–16 percent during March. This broad-based selling reflects what Kedia describes as a “capitulation phase,” where investors exit positions across sectors amid heightened uncertainty.

The ongoing geopolitical tensions in West Asia have acted as a key trigger for risk aversion, but Kedia argues that the correction is equally driven by investor psychology. He points to a dual-layered market environment — one shaped by external geopolitical developments and the other by internal behavioural responses of market participants. According to him, the “war within markets” driven by fear, forced selling, and sentiment breakdown is currently more influential than the geopolitical backdrop itself.

Within this context, small-cap stocks appear to be exhibiting early signs of leadership. Historically, market cycles often see large-cap stocks stabilising first, followed by a broader participation from mid- and small-cap segments. However, Kedia suggests that the current cycle may be unfolding differently, with smallcaps already beginning to outperform on a relative basis. This divergence could indicate that selling pressure in the broader market is nearing exhaustion.

He highlights that individual stock trends within the Nifty are showing signs of “last-mile fatigue,” a technical term suggesting that the downtrend may be approaching its final phase. Such signals typically emerge when selling intensity weakens even as prices continue to drift lower, often preceding a reversal.

Looking ahead, Kedia estimates that small-cap stocks could deliver significant outperformance compared to large caps over the next six months. If benchmark indices such as the Nifty were to recover toward the 27,000 level — implying a 15–17 percent upside from current levels — the small-cap index could potentially rally much more sharply. In such a scenario, he suggests that smallcaps could deliver up to 35–40 percent outperformance, translating into a potential 50 percent upside in the segment.

From a timing perspective, this rebound could play out within the current calendar year, depending on how quickly market stability returns. While the near-term outlook remains uncertain, the medium-term setup appears to be improving as selling pressure eases.