Navigating Tariff Shocks and Earnings Challenges
Market faces earnings downgrades, trade uncertainties, and fading valuations, with geopolitical risks looming; investors should focus on strong companies and normalise expected returns
Pic source IMF
The Indian equity markets experienced a significant setback in April 2025, with a staggering INR 92 trillion loss in market capitalization from the September 2024 peak, driven by the Trump tariff shock. While a relief rally has restored most of the losses, the momentum is waning due to feeble earnings visibility and fading supportive factors. This piece delves into the current market dynamics, the impact of global trade uncertainties, and the outlook for Indian valuations, drawing insights from sectoral performance, liquidity measures, and global economic trends.
Earnings Trajectory: A Persistent Slowdown
The Nifty 50’s earnings growth has decelerated sharply, with FY25 adjusted profit after tax (APAT) growth averaging just 3.5%, plummeting to 0.25% in 4QFY25. The 1QFY26 preview suggests continued lackluster performance, exacerbated by the U.S.’s 10% uniform tariff imposition since April 2025. Key sectors such as Consumer Goods, Banking, IT, and Automobiles are witnessing broad-based demand slackness, with only the materials sector showing resilience due to one-off factors.
The Nifty 50’s earnings growth has slowed from a post-COVID surge of 20% (FY20-FY24) to a two-year CAGR of 7%, and a mere 3.5% YoY in FY25. This slowdown contrasts with official data reporting a 7.4% real GDP growth in 4QFY25, highlighting its disconnect with corporate performance and household situation. Consensus estimates for FY26E-FY28E project a 10% earnings growth, but given the ongoing downgrade cycle, a more conservative 5-6% growth outlook is prudent.
Liquidity and Policy Responses
The Reserve Bank of India (RBI) has injected significant liquidity to counter the slowing economy, with systemic surplus liquidity reaching 1.6% of bank deposits—three times the long-term average. This is partly contributed by the continued slowdown in credit growth (excluding gold loans), leading to easing of the credit/deposit ratio, reflecting cautious lending. India’s policy response has leaned heavily on monetary accommodation, while fiscal support remains constrained, limiting the ability to offset global trade disruptions.
Global Uncertainties: Tariff Wars and Trade Disruptions
The U.S. tariff regime, intensified since April 2025, has evolved into a complex global trade challenge. The deadline for higher tariffs was extended to August 1, 2025, with an additional 10% tariff proposed for BRICS nations and steep increases for specific sectors (e.g., 50% on steel and aluminum, 25% on non-USMCA auto parts, and a potential 200% on pharmaceuticals). Non-tariff measures, such as China’s supply restrictions on rare earth magnets and critical fertilizers, and the withdrawal of personnel from India’s iPhone manufacturing facilities, are further complicating the trade landscape.
The TACO framework’s failure to stabilize trade relations has heightened risks to global growth, with the 18 largest U.S. importers facing an average tariff of 30% from August 1. These developments are likely to impact Indian companies’ earnings, particularly in export-dependent sectors, as global demand weakens and supply chains face disruptions.
Valuation Outlook: Challenges Ahead
The Nifty’s valuation has rebounded 17% from its April 2025 low to a trailing twelve-month (TTM) price-to-earnings (PE) ratio of 23x, but this is only a partial recovery from the 2024 peak. Other indices remain 17% below their 2024 highs, with sector rotation driving selective rebounds. However, several factors suggest that valuations may face downward pressure:
Liquidity Normalization: The RBI’s push for higher retail lending is likely to reduce the current liquidity surplus, tempering market support.
Weak Capital Flows: India’s low ranking in growth and valuation composites is deterring foreign portfolio investment (FPI) flows.
Rising Risk Premiums: Geopolitical tensions and prolonged tariff conflicts are increasing market risk premiums, impacting economic performance.
U.S. Monetary Policy: Elevated U.S. inflation due to tariff hikes (evident in June 2025 PMI data) may keep long-end yields high (10 year UST has rebounded to 4.5%), constraining equity valuations.
Dollar Pressures: De-dollarization trends, bolstered by Basel III’s recognition of gold as Tier 1 capital, reduced corporate demand for dollars, and reduced trade surplus of trading nations, are weakening the dollar index, adding to market uncertainty.
Cumulatively, in a volatile scenario with high unpredictability, negatives outweigh the positives. Thus, Indian markets will continue to depend on domestic flows, which has seen some moderation due to erosion of investor net worth, but that alone may not be sufficient to increase valuations. Valuations are settling lower than pre-COVID averages, as evident across various indices. This would make the task of generating alphas highly complicated and narrative based trade is expected to languish with precedence given to fundamental performance of companies or sectors; positive result surprises will be rewarded, negatives will be penalized significantly.
In sum, Indian market faces a challenging outlook, with persistent earnings downgrades, global trade uncertainties, and fading valuation supports. While liquidity measures and selective sector resilience provide some cushion, the risks of geopolitical tensions, tariff escalations, and weak capital flows loom large. Investors should prioritize fundamentally strong companies and sectors, as narrative-driven trades are likely to underperform. The projected Nifty PE closer to 20x suggests modest returns, with opportunities for alpha generation through careful stock selection and sector rotation.