This is the finding of a new report from Monarch AIF, which describes the past year-and-a-half as a “peculiar phenomenon” in Indian markets: a phase of simultaneous time and value correction where indices stay elevated on the back of a narrow band of large-cap stocks, while hundreds of small and midcap companies have been silently decimated. That divergence, the firm says, is “very rare.”
And now, with the US-Israel strikes on Iran having pushed geopolitics back to the forefront, the Sensex fell over 1,000 points Monday, Nifty closed below 24,900. Investors now face a compounding of forces: a market already bruised by 18 months of stealth selling, now confronting a crude oil shock and the spectre of a widening Middle East conflict.
The question is whether this is the moment to run, or the moment to act.
Bear market hidden in plain sight
“This feels less like a visible crash and more like a stealth sell-off, especially in the broader small and mid-cap space,” said ArunaGiri N, Founder, CEO and Fund Manager at TrustLine Holdings. “And historically, such phases are painful, but they are also when long-term opportunity quietly begins to build.”
He offered three recent examples of what he called “disproportionate price action on the downside.” UPL shares fell 18% or more following a group restructuring announcement, despite high debt not being new information as the market is in a mood now to magnify potential risks, he said. IDFC Bank lost over Rs 14,000 crore in market capitalisation over a potential fraud loss valued at Rs 590 crore. Dishman Carbogen Amcis fell more than 10% following a mild rating agency downgrade. “One can go on,” ArunaGiri said. “Markets are in a less forgiving mood.”Yet within the wreckage, something has changed. Monarch AIF’s analysis shows that currently around 36% of all stocks above Rs 1,000 crore market cap are trading at trailing twelve-month P/E multiples below 25x, up from just 25% in September 2024. Several small but fast-growing companies are now available at one-year forward P/E multiples of less than 20x.The firm also points to the fundamental strength of smaller companies that the sell-off has obscured. Profit before tax for the bottom-half of the listed universe by market cap grew at a CAGR of approximately 20% between 2019 and 2025, with PAT growth running at 25%. Net debt-to-equity for these companies has collapsed to just 0.13x. Revenue CAGR for the bottom half over the past three years stood at 14%, versus 11% for the top half.
Also read: Market crash wipes out Rs 8 lakh cr within minutes; 4 reasons behind today’s routRate cuts add further fuel. Monarch AIF notes that after every rate-cut cycle involving more than 100 basis points, midcap and small-cap indices have staged sharp recoveries, with smaller companies tending to benefit more from operating leverage, leading to better margins and earnings growth.The firm expects further earnings improvement in Q4, with PAT growth in Q3 having been partly suppressed by labour code provisioning. Trade deal announcements with the US and EU are also expected to support export-oriented small caps, with earnings upgrades potentially following through into FY27.
Iran war adding to the pain
Into this already complex picture, the Iran escalation has now landed. History, however, offers some perspective. Elara Securities notes that over the past 25 years of Middle East crises, the median Nifty return is flat at one week and one month, and up 17% at one year. The sell-off deepens meaningfully only when geopolitics morphs into a sustained energy shock, as in the 2011 Arab Spring, when Brent rose 20–25% in the first month and equity drawdowns widened sharply. The Russia-Ukraine episode remains the closest stress template on record.
Emkay Global’s base case is that the current hostilities end in one to two weeks, with markets recovering sharply as they did after the October 2023 and June 2025 episodes. Jefferies, while flagging India’s deep economic linkages with the Middle East — 17% of exports, 55% of crude supply, 38% of remittances — notes that recent regional conflicts have been temporary, and that “a dip could be a buying opportunity.”
Also read: Petronet LNG shares crash 8% after issuing force majeure notices amid Middle East hostilitiesAxis Mutual Fund was equally measured. “Markets price duration and economic impact, not emotion,” the fund house said. “Once it becomes clear that supply disruptions are manageable, policy frameworks remain intact and growth is not structurally impaired, risk premiums compress. For India — where growth is driven by domestic consumption, capex recovery, digitisation and manufacturing realignment — geopolitical shocks are typically interruptions, not inflection points.”
The fund house pointed to a consistent pattern across fifteen years of conflict-driven sell-offs: “Investors who exited equities during earlier conflict-driven sell-offs frequently missed the recoveries that followed — sometimes within a relatively short span.”
What should investors do?
Back to the underlying bear market question. ArunaGiri’s prescription is blunt: “It is time to put capital to work, not to time the bottom.” He acknowledges the challenge — “that approach will call for a stubborn stomach to digest temporary and notional losses” — but argues that the number of opportunities offering attractive free cash flow and payout yields alongside high growth potential “have witnessed a sharp surge. Exciting times for bottom-up stock pickers.”
Monarch AIF agrees, saying the risk-reward for bottom-up stock picking has turned “favourable” in a way that typically only happens after a bear market has run its course.
The indices may not be telling you that the bear market is here. But for 80% of Indian stocks, it very much is and some of the most experienced voices on Dalal Street are quietly starting to shop.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
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