Navigating the Market Maze: Insights on Equities, Tariffs, and Global Trends

Global markets have shown mixed reactions to U.S. trade tariffs, with gold, Bitcoin, and the S&P 500 rising, while Indian equities lagged, gaining just 6%. FIIs have withdrawn heavily, impacting India. Despite challenges, fund managers remain optimistic about India’s growth, driven by GST cuts and trade talks. Risks from a potential U.S. market correction loom. Experts recommend balanced asset allocation, combining equities and metals, as India eyes recovery amidst global uncertainty.

When former U.S. President Donald Trump imposed trade tariffs six months ago, many feared the move would severely disrupt global markets. Predictions of a sharp decline in the S&P 500 and a surge in precious metal prices dominated the discourse. While some of these forecasts played out partially, the reality has been more nuanced.

Over the past six months, gold prices have climbed by 21%, while the S&P 500 has defied expectations with a remarkable 26% increase. Bitcoin, too, has risen by 22%. However, the Indian stock market, represented by the Nifty 50, has lagged behind, gaining only 6% during the same period. This underperformance is largely attributed to weak corporate earnings and steep valuations, compounded by ongoing trade negotiations with the U.S.

Challenges for Indian Equities

India has been among the hardest-hit markets since the trade tariffs came into effect. Foreign Institutional Investors (FIIs) have been steadily withdrawing from Indian equities, net-selling ₹1.57 lakh crore over the past 22 months. With such significant outflows, it may take time for foreign investors to regain confidence and return to Indian markets.

Despite these challenges, fund managers remain optimistic. They believe that the Indian stock market, although battered by the tariff fallout, holds the potential for strong returns in the coming year. However, they caution investors to remain watchful.

Veteran investor Ramesh Damani remains bullish on India's prospects. In a recent interview, he noted that while the past year has been flat, long-term investors have seen healthy returns since 2022. He emphasized that Indian corporations have effectively navigated the tariff-induced turbulence, suggesting that the worst may now be behind them.

A Glimmer of Hope: Positive Projections

Sanjiv Prasad, CEO of Kotak Institutional Equities, has also offered a positive outlook in his latest report. He anticipates a 7.9% year-on-year growth in net profits for the BSE 30 index and a 5.4% increase for the Nifty 50 index in Q2 FY26. Prasad projects earnings per share (EPS) for the BSE 30 index to reach ₹3,559 in FY26 and ₹4,248 in FY27, while the Nifty 50 index EPS is estimated at ₹1,086 in FY26 and ₹1,284 in FY27. Although Prasad has previously been skeptical about India's growth trajectory, his latest projections are being viewed as a major confidence booster.

Fund managers are also encouraged by "green shoots" in the Indian economy, such as GST rate reductions expected to spur demand, the possibility of reduced U.S. tariffs, and promising developments in the financial sector. They believe these factors could enable Indian equities to outperform other emerging markets in the near future.

The Looming Risk: U.S. Market Volatility

However, not all is rosy. A potential correction in the U.S. stock market, particularly the S&P 500, poses a significant risk. The Schiller P/E ratio of the S&P 500 stands at 39x, 23% higher than its long-term average, signaling overvaluation. If the S&P 500 experiences a downturn, global markets, including India, are likely to feel the ripple effects. With a 65% correlation between the monthly returns of the S&P 500 and the Nifty 50, a 10% drop in the U.S. market could lead to a 6.5% decline in Indian equities.

The concentration of market value in a handful of U.S. tech giants further exacerbates the risk. According to Goldman Sachs, the 10 largest U.S. stocks—eight of which are tech companies—account for nearly 25% of the global equity market. While these companies boast strong fundamentals, their elevated valuations heighten the risk of a market correction.

Former IMF Chief Economist Gita Gopinath has expressed concerns about the overheated U.S. market. She warned that a crash on the scale of the dot-com bubble could erase $20 trillion in American household wealth, equivalent to 70% of the U.S. GDP as of 2024. Globally, such a crash could wipe out $35 trillion in wealth, with significant repercussions for markets worldwide.

The Path Forward: Equities or Precious Metals?

So, what should investors do amid such uncertainty? Many experts advise sticking to a balanced asset allocation strategy. While equities are expected to deliver growth, particularly in India, some believe it is prudent to retain a portion of investments in precious metals as a hedge against market volatility.

Gautam Shah, founder of Goldilocks Global Research, has shifted his stance over the past year. After advocating for investments in gold and silver amid global uncertainty, he now encourages investors to book profits in precious metals and pivot towards equities. He also expects FIIs to return to Indian markets as earnings growth picks up and trade negotiations with the U.S. progress positively.

However, the road ahead remains challenging. Despite domestic mutual funds injecting $90 billion into Indian markets over the past year, this has not been enough to offset FII outflows. Without renewed foreign interest, Indian equities may continue to face stagnation in the short term.

Staying the Course in Uncertain Times

As markets navigate a complex landscape of trade tariffs, global economic shifts, and potential corrections, the key for investors is to maintain a disciplined approach. Diversification and long-term planning remain essential strategies. While the future may hold uncertainties, India’s potential for earnings growth and its ability to weather global challenges offer hope for sustained returns in the years ahead.