Small- and mid-cap surge signals rising risk appetite. Will the rally endure?

Since the US-Iran conflict began in late February, the Nifty50 has fallen 4.7% while the Nifty Midcap 150 and Nifty Smallcap 250 have gained 3.8% and 9.4% respectively, both hitting fresh highs in May. The share of mid- and small-caps in the Nifty 500 market capitalisation rose to a record 35.8% as of 14 June, reflecting a shift in capital away from blue-chips. Mid-caps posted the strongest FY26 profit growth at 21% among BSE 500 companies, followed by small-caps at 11% and large-caps at 7%, though elevated valuations (Midcap 150 at 24x forward P/E, Smallcap 250 at 20x versus Nifty50 at 16x) and El Nino risks could test the sustainability of the rally.