Mid and small-caps look expensive: Should you rebalance your portfolio as earnings could lift equities from October?

Indian equities could be heading for a re-rating as corporate earnings are expected to improve in the second half (H2) of the financial year and domestic institutional investors continue to support the market, according to Omniscience Capital.

H2 refers to the second half of FY27, covering October 2026 to March 2027.

However, investors may need to be more selective, particularly in the mid- and small-cap segments, where valuations remain elevated,

For investors with significant exposure to these segments, the key question is whether the current valuations leave enough room for future returns or whether portfolios need to be reassessed.

Are mid- and small-caps still expensive?

Omniscience Capital points to a valuation gap across market-cap segments. While the broader market remains in a consolidation phase, pockets of small- and mid-caps remain overvalued.

Consolidation is a period when markets move within a relatively narrow range without a clear upward or downward trend.

“The Nifty Smallcap 250 and Midcap 150 trade at trailing P/E multiples of around 34x and 30x, respectively, compared with around 20x for the Nifty 100.” The firm cautions that investors may already be paying for several years of strong earnings growth.

“Multi-year forward earnings execution is fully priced in, leaving prospective returns barely near the discount rate while exposing investors to severe de-rating risk,” said Ashwin K. Shami, President & Chief Portfolio Manager, OmniScience Capital.

For investors, this does not necessarily mean exiting mid- and small-caps altogether. Instead, high valuations make stock selection, earnings visibility and portfolio allocation more important.

Should investors rebalance instead of chasing recent gains?

Omniscience Capital expects equities to re-rate as H2 earnings accelerate alongside a steady return of domestic institutional capital. Against this backdrop, the firm views the current period of market consolidation as an accumulation window rather than an opportunity to chase recent performance.

“Periods of macro consolidation should not be met with anxiety or speculative churn that chases recent performance. They are instead ideal for deploying capital into high-quality growth businesses available at discounted valuations,” added Shami.

For investors, this could mean checking whether portfolio allocations have become overly concentrated in expensive mid- and small-cap stocks and whether the underlying businesses can justify their valuations through future earnings growth.

Where does the firm see opportunities?

The firm notes that “moderation in Indian equity valuations has led to renewed institutional interest, with foreign investors turning net buyers on multiple occasions after a two-year moderation in valuations.”

It also expects “FY27 real GDP growth estimated at around 7%” to support domestic fundamentals.

As per Omniscience Capital, opportunities are concentrated in businesses exposed to sustained growth and operating leverage but available at favourable valuations.

Its preferred areas include “banking and financial services, infrastructure and power, and business services”, supported by “resilient credit growth, rising electricity demand and a recovery in corporate capex.”

What risks should investors watch?

Global risks remain important. According to the firm, “US 10-year Treasury yields near one-year highs of 4.6%-4.7%” could continue to influence equity valuations, while the US Federal Reserve’s September 16 policy decision remains a near-term trigger.

Crude oil is another concern. The firm notes that prices have “rapidly surged 20% to 30% over the last month” amid escalating Middle East tensions.

For retail investors, the takeaway is less about making a broad market call and more about reviewing whether portfolio valuations, concentration and expected earnings growth remain aligned.

With parts of the mid- and small-cap space still expensive, consolidation could be a time to rebalance selectively rather than chase past performance.