Vivek Iyer of Rational Asset Management warns that mid- and small-cap stocks may face more price corrections as crude oil prices remain above $100 per barrel. This cost pressure, combined with overly optimistic earnings estimates, is expected to squeeze profit margins, particularly for companies lacking pricing power.
Indian investors may need to prepare for continued volatility in the mid-cap and small-cap market segments. Vivek Iyer, Chief Investment Officer at Rational Asset Management, has projected a period of adjustment for these stocks, driven by a combination of high input costs and realistic earnings revisions that the market has yet to fully account for.
The primary concern highlighted is the sustained high price of Brent crude, which has remained above $100 per barrel. For the Indian economy, which relies heavily on energy imports, this is a major factor impacting corporate profitability. While large-cap companies often possess the scale and market position to pass higher costs to consumers, smaller and mid-sized firms frequently lack this pricing power. Consequently, when raw material and logistics costs rise, these smaller companies see their profit margins shrink directly. Investors should closely examine the upcoming quarterly results to see which companies are managing these cost pressures effectively.
Another significant issue is the disconnect between current stock prices and actual earnings growth. Many growth projections for the 2027 fiscal year appear optimistic, failing to account for the current economic environment. If companies are unable to protect their margins, their earnings per share will likely fall short of analyst expectations. This would force the market to lower its valuation multiples, leading to a downward recalibration of stock prices.
The global macro environment is also weighing on the local market. Elevated US 10-year Treasury yields provide an attractive risk-free return for global investors, making emerging market equities less appealing by comparison. This has historically led to reduced capital inflows from foreign institutional investors, which can disproportionately impact the more liquid mid- and small-cap segments.
Specific sectors are also showing signs of strain. The IT sector is in a transition phase where the excitement around artificial intelligence is being tempered by the cannibalization of core business revenues. At the same time, the power sector, while benefiting from strong demand, is currently trading at valuations that have already priced in aggressive future growth, leaving little margin for error if earnings growth slows.
As the market navigates this phase, investors should focus on management commentary regarding future earnings guidance and margin stability. The key for shareholders will be to identify companies that can maintain profitability despite the current commodity price environment, as market expectations adjust to reflect the reality of tighter corporate margins.