Should investors be concerned about a small-cap index correction?

Capitalmind Financial Services warns that the BSE Smallcap 250's 63 percent P/E multiple increase since July 2023, with EPS flat at -3 percent, suggests a high correction risk if earnings don't improve. The index's 96 percent surge since April 2023 contrasts with the Sensex's 34 percent rise, highlighting potential overvaluation in small-cap stocks.

Media Coverage: Small-cap index likely to witness correction if earnings don’t catch up

6 Aug 2024CM Team1 min read

Quick Facts

Should investors be concerned about a small-cap index correction?: Capitalmind Financial Services warns that the BSE Smallcap 250's 63 percent P/E multiple increase since July 2023, with EPS flat at -3 percent, suggests a high correction risk if earnings don't improve. The index's 96 percent surge since April 2023 contrasts with the Sensex's 34 percent rise, highlighting potential overvaluation in small-cap stocks.

The BSE Smallcap 250 index has experienced upward momentum following the COVID-19 crash in 2020. Seeing a hiatus for 15 months in the middle, between January 2022 and March 2023, the index has been rallying again since April 2023.

The small-cap index has surged 96 percent since April 2023 as against 34 percent rise in Sensex.

According to a recent study by Capitalmind Financial Services, the P/E multiple of the BSE Smallcap 250 has increased by 63 percent over the one-year period ending July 11, 2024, while Earnings Per Share (EPS) has remained flat at -3 percent. This suggests that the P/E multiple expansion is primarily driven by rising prices rather than earnings growth. Capitalmind warns that if earnings do not improve, there is a high probability of a price correction in the small-cap index…

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