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Analysts Raise Concerns Over Inflated Valuations in Mid and Small-Cap Stocks

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Concerns persist on inflated valuations in mid and small-cap stocks, say analysts

Investor sentiment remained volatile this week, influenced by pivotal policy decisions by major central banks. The unexpected interest rate hike by the Bank of Japan and ECB’s decision to maintain rates contributed to subdued market sentiment. However, the market rebounded following the Fed’s indication to proceed with three interest rate cuts this year, despite inflation remaining above the long-term target.

Last week, mid & small-cap stocks saw a recovery as buying improved led by continued DIIs & FIIs inflows. The IT sector faced challenges due to global slowdown in spending, while investors shifted focus towards the realty sector, which emerged as the top performer of the week. The bounce is expected to continue in the short-term as traders punt to buy when the market is trading at oversold territory.

Vinod Nair, Head of Research at Geojit Financial Services, stated that concerns persist regarding inflated valuations in mid and small-cap stocks. Large caps are expected to outperform in the medium term. Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services, mentioned that next week being a truncated week with the derivatives’ monthly expiry, there might be some volatility while Nifty is likely to consolidate at higher levels. US GDP data and other key economic data would also keep investors busy.

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