Fundamentals same, but irrational exuberance drives meteoric rise in mid and small-cap stocks

There is scant evidence to attribute the recent remarkable mid-cap and small-cap stock price surge to fundamental business improvements. In many cases, these fundamentals have actually deteriorated. Instead, the rally seems to be fueled primarily by investor over-optimism, driven by robust past performance in these sectors.

This exuberant sentiment is reflected in several key indicators:

1. Significant price jumps in numerous mid-cap and small-cap stocks.

2. Large capital inflows into mid-cap and small-cap mutual funds.

3. An influx of new retail investors participating in these funds.

The strong recent performance of mid-cap and small-cap indices has likely amplified return expectations among retail investors, even in the absence of compelling fundamental changes.

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