While US small and medium enterprises have posted muted earnings in recent years because of high inflation, supply chain disruptions, and elevated interest rates, a number of factors now favour them.
The US Federal Reserve’s decision to lower interest rates, cooling inflation, and stabilising wage growth favour SMEs as these companies react quickly to credit costs and economic momentum, said Vinay Jaising, chief investment officer and head of equity advisory at ASK Private Wealth.
Historically, US smallcap and midcap (smid) indices outperform during the early-to-mid phase of an economic recovery, he explained, adding that earnings-per-share growth in the mid-teens looked achievable for US smallcap and midcap companies in 2–3 years.
Indian smids, in the meantime, have been on a tear, far outpacing their US counterparts.
“Over the past 5 years, Indian smids have enjoyed a massive earnings boom. Going forward, however, the pace of earnings expansion may moderate,” Jaising said.
“Structural drivers like government capex (capital expenditure), consumption growth, and policy reforms remain positive, and earnings growth could remain healthy—at 15–18% CAGR (compound annual growth rate—but probably not at the extraordinary levels of the past few years,” he added.
Over the past year, the US’s S&P Midcap 400 and Smallcap 600 indices gained slightly over 6% each, while India’s Nifty Midcap 100 and Smallcap 250 rose 8% and 2%, respectively. But over a 5-year period, while the S&P Midcap 400 index gained 12% and the Smallcap 600 about 11%, the Nifty Midcap 100 and Smallcap 250 jumped 27% each.
Key Takeaways
- After years of strong domestic returns, several top Indian wealth managers are now eyeing US smallcap and midcap stocks to tap into a different economic cycle and potentially better value.
- India’s smallcap and midcap indices trade at richer valuations than their US counterparts, suggesting limited upside at home and fresh opportunities overseas.
- But easing inflation, falling interest rates, and stabilising growth in the US are setting the stage for American small- and mid-sized companies to recover after a muted few years.
An earnings reset
Wealth managers Mint spoke with said while Indian smids can still deliver decent returns, the bigger upside might now be in their US peers.
Indian markets look pricey, but in the US there’s room to grow as an economic recovery could give small stocks an extra push, said Arindam Mandal, head of global equities at Marcellus Investment Managers.
While Indian small and medium enterprises have posted strong earnings over 3–4 years, earnings of US smallcap and midcap companies have not grown since 2022, which could give investors in US smids a chance to benefit when the US economy shows signs of improvement, he added.
The S&P Midcap 400 and Smallcap 600 are trading at 20.2 and 22.6 times their price-to-earnings (PE) ratio, close to their 15-year averages of 20.75 and 24.23, Bloomberg data show. In contrast, India’s Nifty Midcap 100 and Smallcap 250 command richer valuations at 33.2 and 31.9 times, as compared with their 15-year averages of 28.35 and 72 times.
The S&P Midcap 400 and Smallcap 600 are 3.2% and 4.9% shy of their record highs reached in November last year. The Nifty Midcap 100 and Smallcap 250 trail their September 2024 lifetime highs by about 2% and 7%.
In the first half of 2025, actively managed US smid funds performed better than their large-cap peers and their benchmarks, pointed out Feroze Azeez, joint chief executive, Anand Rathi Wealth Ltd.
“Around 75% of midcap funds beat the S&P MidCap 400, while nearly 78% of smallcap funds outperformed the S&P SmallCap 600, reflecting solid earnings traction and effective stock selection,” he said.
Historically, US midcap stocks have compounded earnings at 12–15% in rupee terms, broadly similar to Indian smids, but domestic smallcap and midcap stocks are beginning to face modest headwinds, added Mandal of Marcellus Investment Managers.
“There are always exceptions,” he said, “but it seems the US smid space may be closer to the end of its earnings reset cycle, whereas India’s might be a bit farther from that.”
Spreading the bets, and chasing alpha
From a diversification standpoint, adding exposure to US smids will allow Indian investors to tap into a different economic cycle, currency exposure, and sector composition, said Jaising of ASK Private Wealth, which manages assets worth about ₹44,000 crore.
US smids offer exposure to the US economic cycle and can perform differently from Indian smids, which are more domestic-demand or capex-driven, added Trideep Bhattacharya, president and chief investment officer—equities, Edelweiss Asset Management.
“Hence, US smids offer a complementary, higher-quality, and potentially cheaper opportunity set for diversified alpha—both should be used together with active selection and disciplined sizing,” he said.
Alpha refers to generating excess returns above potential returns from benchmark indices.
Global exposure itself provides meaningful diversification to investors, and within that, the valuation disconnect in certain US sectors adds to the opportunity, added Marcellus’s Mandal.
A cyclical tailwind from consumer spending or manufacturing could drive a sharp rerating in several high-quality sectors. Even predictable, high-quality businesses such as healthcare have been punished on policy headlines, and value is starting to emerge there, he said.
With these segments currently out of favour, investors will need patience, and sentiment shifts are hard to time. Still, he said, the core argument stands: “US smids offer both diversification and potential alpha.”
Marcellus runs a portfolio management service (PMS) and an alternative investment fund (AIF) in GIFT City, giving Indian investors access to US equities. Its Global Compounders strategy, launched in October 2022, helps investors tap into the growth of global enterprises and opportunities across North America, Europe, and Asia. Through this, Marcellus manages over ₹300 crore across its PMS, AIF, and advisory platforms, delivering returns at a CAGR of 27.3% in rupee terms since inception.
Edelweiss Asset Management’s US Tech Fund invests across largecap, midcap, and smallcap technology companies. Launched in March 2020, the fund has delivered returns at a CAGR of 24% since inception, and 38% CAGR over the past three years.
ASK Private Wealth and Anand Rathi Wealth do not manage any US-related funds.