Comparison of U.S and Indian Midcap Valuations

As of February 20, 2025, U.S. midcap stocks have demonstrated resilience amid market volatility. The S&P MidCap 400 Index has outperformed the S&P 500 year-to-date, reflecting investor confidence in mid-sized companies. Valuation metrics indicate that the S&P MidCap 400 trades at a forward price-to-earnings (P/E) ratio of approximately 16x to 18x, aligning with historical trends. However, within growth-oriented segments, particularly in the Russell Midcap Growth Index, over 40% of constituents are trading above 40 times earnings, significantly higher than the historical range of 10%-20%.

In contrast, Indian midcap stocks have experienced a correction. The Nifty Midcap 100 Index has declined by approximately 13% since its peak in late September 2024, underperforming both Asian and global emerging market counterparts. Despite this downturn, valuations remain elevated, with the Nifty Midcap 100's forward P/E ratio at approximately 33x, representing a premium of about 58% over the Nifty 50's 20.8x. This premium persists even after significant foreign institutional investor outflows, exceeding ₹85,000 crore in 2025, and a slowdown in corporate earnings growth, which stood at 5% in the October-December quarter. Analysts anticipate continued market weakness at least until the end of March, with some predicting prolonged pressure due to weak earnings and high valuations.

Indian midcaps’ high valuations stem from a multi-year rally in 2023-2024, where they doubled the returns of large caps, fueled by domestic investor enthusiasm and growth optimism. However, the correction in 2025 suggests a partial unwind of this exuberance, though they remain pricey relative to fundamentals, with some analysts arguing a further 15-20% adjustment could align them with historical averages.

Current Valuation Metrics of Indian Midcaps

• Nifty Midcap 100: The forward price-to-earnings (P/E) ratio stands at approximately 33x, compared to the Nifty 50’s 20.8x, reflecting a 58% premium over large caps. This is down from its peak in 2024 but still elevated compared to historical averages.
• BSE Midcap 150: Trades at around 26x P/E, below its 5-year median of 30.6x, indicating a partial correction. It remains 45% above the Nifty 50, suggesting a persistent premium.
• Historical Context: Over the past decade, Indian midcaps have traded at premiums ranging from 20%-50% over large caps, with current levels near the higher end despite a year-to-date correction of 7%-14% (Nifty Midcap 100) and an 18% drop from its September 2024 peak.

 

• U.S. Midcaps: Forward P/E of 16x-18x (S&P MidCap 400) to 40x+ (Russell Midcap Growth extremes). This range reflects a mature market with pockets of overvaluation in growth stocks.

 

1. Growth Context:
• U.S.: Midcaps benefit from a stable economy, with GDP growth projected at 2%-3% for 2025. Earnings growth is moderate but consistent, supporting valuations in less speculative segments.
• India: Midcaps operate in a higher-growth economy (6.3%-7% GDP growth expected), but recent earnings slowdowns and macro pressures have dented confidence. The premium reflects past outperformance rather than current fundamentals.
• Takeaway: U.S. midcaps appear more reasonably priced for their growth, while Indian midcaps’ valuations seem stretched despite higher economic growth potential.

Is This the Right Time to Build a Long-Term Portfolio?

1. Correction Creates Entry Points:
• The 18% decline from the September 2024 peak and year-to-date losses suggest some overvaluation has been priced out.  Market reports note that midcaps are forming higher bottoms (e.g., February 19’s 1.39% bounce), hinting at a potential trend reversal or stabilisation.
• For long-term investors (5-10 years), current levels could offer a base to capture future growth, especially if India’s GDP growth sustains at 6.3%-7%.
2. Long-Term Growth Potential:
• Indian midcaps have historically outperformed large caps over extended periods (e.g., 2x returns over a decade), driven by India’s structural growth story—rising middle-class consumption, infrastructure spending, and digitalization.

3. Selective Opportunities:

• The correction has separated winners from losers. Companies with strong balance sheets, sustainable cash flows, and reasonable valuations (closer to 20x-25x P/E) are emerging as attractive picks for a long-term portfolio.

 

Conclusion

Focus on Quality: Target midcaps with:

• P/E ratios are closer to 20x-25x (below the index average).
• Strong fundamentals (e.g., revenue growth >10%, debt-to-equity <1, positive cash flow).
• Exposure to resilient sectors (e.g., IT, healthcare, consumer durables).

Indian midcaps in February 2025 aren’t at rock-bottom valuations, but the correction has made them more palatable for long-term investors than they were in 2024. While risks potentially push valuations lower—this isn’t a bad starting point if you’re selective and patient. The “right time” for a long-term portfolio is less about precision timing and more about disciplined entry and holding quality stocks through cycles.