A sharp rebound in India's smallcap stocks after the brutal March selloff, that worsened a difficult 12-month period, has thrown up a new set of market winners of late. Several beaten-down names delivered multibagger returns in barely two months even as the broader market remains under pressure.The rally has been especially striking because many of these stocks had barely moved over the previous year and had significantly underperformed benchmark indices before the recovery began.Data from Ace Equity showed stocks such as Sterlite Technologies, MTAR Technologies, HFCL and Nintec Systems surged between 100% and 134% from their March lows. Sterlite Technologies rose around 134% from its March bottom, while MTAR Technologies gained nearly 129%. HFCL climbed over 108%, while Nintec Systems advanced more than 111%.Other names such as Sigma Advanced Systems, Mrugesh Trading and United Foodbrands also more than doubled from recent lows.The Nifty Smallcap 100 had fallen nearly 10% during the selloff in March as global markets reeled under the impact of the Iran conflict, surging crude oil prices and heavy foreign institutional investor outflows.Valuations across the smallcap segment compressed sharply during the correction, pushing earnings multiples close to one-year lows. The sharp recovery since then reflects a mix of improving risk appetite, stabilising crude oil prices, stronger-than-expected quarterly earnings and renewed bottom-up stock picking.Brokerage firm JM Financial said valuations across midcaps and smallcaps have rebounded after the March correction but still remain below FY26 averages, suggesting selective opportunities in quality franchises.The brokerage noted that broader market valuations had compressed sharply during the selloff before recovering in April.Hopes of a US-Iran peace deal has since pulled crude prices back to an extent, but structural pressure on India’s external account persists, JM Financial said in a note.The rebound in smaller stocks has also coincided with improving domestic liquidity conditions. Systematic investment plan (SIP) inflows into mutual funds have remained resilient despite global uncertainty, while domestic investors have increasingly returned to selective midcap and smallcap buying after nearly two years of subdued returns in several segments.Aashish P Somaiyaa, CEO of White Oak Capital Management, said the latest rally is being driven more by stock-specific earnings delivery rather than broad-based speculative buying."The results in small and midcaps have been strong and have surprised investors," Somaiyaa told ET Markets. He added that investors who had largely abandoned the segment after a long period of weak returns are now returning selectively."It's more bottom-up selective stock picking wherever the numbers are looking good. But by and large, the numbers for March for small and mid cap have been better than what people thought," he said.Foreign portfolio investors have also started selectively increasing exposure to certain midcap and smallcap companies that are delivering strong quarterly numbers and maintaining growth visibility despite macro uncertainty.Still, market participants remain cautious about the sustainability of the rally. Analysts said the next leg of the move will depend heavily on earnings delivery, management commentary and global macroeconomic developments rather than liquidity-driven momentum alone.Crude oil remains one of the biggest risks for Indian equities. Brent crude had surged to nearly $120 per barrel during the peak of the West Asia conflict before easing in recent weeks. Elevated oil prices typically hurt India’s current account balance, weaken the rupee and increase inflationary pressure, factors that often reduce foreign investor appetite for Indian equities.JM Financial noted that foreign investors sold a net $7.3 billion worth of Indian equities during April as geopolitical tensions intensified and India’s merchandise trade deficit widened sharply.The brokerage also pointed out that while sectors such as autos and pharma have recovered strongly, banks and several large-cap sectors continue to trade below historical valuation averages because of persistent foreign selling.Smallcaps, meanwhile, remain vulnerable to sharp swings in sentiment because of lower liquidity and higher volatility. Several of the stocks now witnessing sharp rebounds had earlier corrected significantly because of weak earnings visibility, rich valuations or broader risk aversion toward smaller companies.Analysts warn that rapid rallies in smallcaps can often reverse quickly if earnings disappoint or global conditions deteriorate. "Profit-booking cannot be ruled out," analysts said, particularly if crude oil prices move higher again or if foreign investor outflows intensify.There are also concerns that retail participation in smaller companies has increased sharply over the past few years, often amplifying both rallies and corrections. Unlike largecap companies, smallcaps are generally more sensitive to liquidity conditions, borrowing costs and sudden shifts in investor sentiment.For now, however, the recovery has reignited interest in a segment that many investors had written off after nearly two years of weak performance. Whether the rally sustains from here may depend less on momentum and more on whether earnings can continue to justify the sharp rebound in stock prices.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)