Small-cap stocks show recovery potential after recent decline

Small-cap stocks have recently entered a bear market after strong gains in 2023 and 2024. The Nifty Smallcap 100 Index fell 25% from its peak in September 2024, with many individual stocks experiencing significant declines. Despite this downturn, macroeconomic conditions are improving. GDP growth has increased, government spending is rising, and fiscal and monetary policies have become more supportive, which may benefit small-cap equities. Small-cap stocks are now more attractively valued compared to mid-cap stocks. The earnings outlook is also improving, suggesting a potential recovery. Investors may consider including small-cap equities in diversified portfolios.