Nifty plunged on muted earnings and Trump tariffs tantrum

·       At around 889 TTM EPS (Q3FY25) and 22000 Nifty levels, the TTM PE is still around 24.75, at expensive levels compared to the average EPS growth rate of 12%

·       Looking ahead, Nifty EPS may grow around 9.5% CAGR for FY: 26-27, and in that scenario, the projected fair value of Nifty for FY: 26-27 may be around 22100-24200

·       Although, technically 21800 is a good support zone for Nifty, muted earnings growth amid domestic and Trump trade war challenges may also cause a deeper correction in the future

India’s benchmark stock index Nifty tumbled almost 15% in the last five months (October 2024 to February 2025) on muted earnings growth and the Trump tariff tantrum. India’s domestic producers may face stiff competition from cheaper imports, having superior quality and brand value. And Indian exporters may also face Trump tariffs dilemma in the coming days. The stock market is all about earnings (EPS) and all others are noise. The TTM EPS for Q3FY25 stands around INR 889 vs 837 in FY24 and at a current run rate, the FY25 Nifty EPS may come to around INR 916 instead earlier market consensus of around INR 1035. The FY26 Nifty EPS may come to around INR 1004. Thus considering a fair PE of 22, the current fair value of Nifty is around 19580 (889*22 and the projected fair value for FY25 and FY26 should be around 20152 (916*22) and 22088 (1004*22).

The TTM Nifty EPS for Q3FY25 was around 889 vs 858 sequentially and 837 at Q4FY24.

The current fair valuation of Nifty may be around 19580-20152:

At around INR 915 estimated Nifty EPS for FY25 and actual EPS INR 837 for FY24, the growth would be around 9.0%; assuming 9.5% average growth for FY26 AND FY27, the Nifty EPS may come to around INR 1004 and INR 1099. In that scenario, assuming 22 fair PE, the projected fair value of Nifty for FY27 may be around 24176 (~24200). The average growth rate of Nifty EPS is around 12% for FY: 2018-24 on average; against this, the average PE is quite expensive at around 25. Now looking forward, Nifty EPS may grow around 9.5% on an average in FY: 2026-27 amid India’s economic slowdown, higher cost of living, weak labor market; i.e. higher unemployment and under-employment, slowing discretionary consumer spending and Trump tariffs tantrum.

The projected FY:26-27 fair value of Nifty may be around 22088-24175. As the stock market is a forward discounting machine, we may assume 22000 as the Nifty bottom for the time being (unless there is more bad news) and 24200 would be the target for FY26. And in the worst-case scenario, Nifty may also further correct towards 20000-19500 in FY26, if India’s macro-economic situation further worsens and Indian tariffs get reduced, leading to lower revenue and lower margin for domestic producers.

Between October 2024 and February 2025, India's benchmark stock index, the Nifty 50, experienced a significant decline of nearly 15%. Nifty made a low of around 21965 in early March’2025 after making a life time high of around 26275 in late September’2024. Thus Nifty corrected almost 4300 points or around 16.4, just stopped before entering the technical bear market territory of 20% correction from the top. This downturn was influenced by a combination of global and domestic factors, leading to widespread investor concern and market volatility.

Domestic Economic Challenges: India has faced rising inflation and higher interest rates during this period. These factors have contributed to reduced discretionary consumer spending and business investments, further dampening market sentiments. Delayed government spending, tighter liquidity conditions, and unfavorable weather conditions hampered key sectors like agriculture and infrastructure, which in turn affected stock market sentiment.

Stretched valuations following the 2024 rally (Nifty hit a peak P/E ratio) and disappointing sectoral performance (e.g., IndusInd Bank plunged 18.6% in October due to microfinance stress) fueled the sell-off. The mid-cap index entered bear market territory, falling over 20% from its September peak.

Corporate Earnings Downgrades: A significant number of Nifty 50 companies have experienced earnings downgrades. In February 2025, 60% of the index constituents saw cuts to their FY26 earnings estimates, reflecting challenges in maintaining profitability amidst economic headwinds. Corporate earnings growth decelerated sharply, undermining investor confidence. High inflation (above 5% CPI), stagnant household incomes, and weaker consumer spending squeezed corporate profitability. Sectors like retailing and industrial gases saw steep declines, reflecting cautious consumer sentiment and rising input costs.

Geopolitical Tensions Ongoing conflicts, such as Gaza and Ukraine wars, kept investors on edge, with potential escalation threatening oil price spikes—a critical concern for India as a net oil importer. While not the primary driver, these tensions compounded global risk aversion, indirectly pressuring the Nifty through higher volatility and uncertainty.

Global Economic Concerns: Escalating global trade tensions led by US President Trump, particularly between major economies, have heightened uncertainties in international markets. Additionally, a slowdown in the U.S. economy has raised concerns about global economic growth, impacting investor sentiment globally. Global trade tensions, particularly those initiated by U.S. President Trump's tariff announcements, added to the economic uncertainty and risk aversion among investors.

Global Uncertainty and U.S. Trade Policy Concerns: Escalating fears of a global trade war, triggered by U.S. President-elect Trump’s proposed tariffs, rattled markets worldwide, including India. Trump’s suggestions of a 25% tariff on imports from Mexico and Canada (delayed to April 2025) and potential tariffs on European goods and reciprocal tariffs heightened uncertainty, affecting export-oriented sectors for Tariff King India.

Foreign Institutional Investor (FII) and Retail Withdrawals: A major factor contributing to the market's decline was the substantial sell-off by foreign institutional investors. Since October 2024, FIIs have withdrawn over ₹2 lakh crore (INR 2 Trillion) from Indian equities, exerting significant downward pressure on the Nifty 50 index. Although FIIs selling was almost fully absorbed by DIIs buying, net Retail withdrawals caused a significant downtrend even after buying by various brokerage houses on PROs a/c. However, this massive FII outflow significantly impacted market sentiment and liquidity. Overall, FIIs sold a record Rs 2.96 Trillion in 2024, a stark contrast to the Rs 1.7 trillion inflows in 2023.

China’s India’s pain: The exodus was driven by a redirection of capital to China, spurred by Beijing's stimulus measures and relatively cheaper valuations, as well as heightened global uncertainty following U.S. tariff threats. A weakening Indian rupee further diminished India's appeal as an investment destination, amplifying FII outflows.

Domestic Institutional Investors (DIIs) Inaction: Unlike previous instances where DIIs supported the market during FII outflows, this time they were hesitant to intervene heavily. DIIs were stuck at higher levels and were cautious about repositioning their portfolios until market clarity emerged and thus so far refrained from big-scale buying. Also, slowing retail SIPs into Mutual Funds has made them cautious.

Rupee Depreciation: The Indian rupee has weakened against major currencies, making imports more expensive and contributing to inflationary pressures. This depreciation has also led to concerns among foreign investors about potential returns, prompting further capital outflows. But higher USDINR is also good for export-heavy Nifty earnings as almost 60% of Nifty EPS comes from export activities led by RIL, ONGC, IT service companies (Infy, TCS) and also Pharma and automobiles to some extent.

MSCI Rebalancing: The upcoming rebalancing by global index provider MSCI also contributed to market volatility, as investors anticipated changes in index compositions and potential outflows.

Rising U.S. Bond Yields: Higher U.S. bond yields made U.S. assets more attractive compared to emerging markets like India, leading to capital outflows from Indian equities.

Regulatory Changes: SEBI's measures to curb speculative trading and increase lot sizes for derivatives may reduce volatility but could also impact liquidity and trading strategies in the market.

Outlook for the Nifty 50:

As of March 10, 2025, the Nifty 50 has shown signs of stabilization, supported by gains in banks & financials and metals (Trump tariffs caused higher prices of metals). However, the market anticipates only a gradual market recovery despite improvements in economic growth. Volatility is expected to remain elevated in the near term due to uncertainties surrounding reciprocal tariffs and global trade tensions. Certain consumer sectors like auto have shown resilience on expectations of improved economic growth in H2FY25.

This sharp correction for the Indian stock marked one of the most severe downturns in recent years, erasing gains accumulated during a robust rally earlier in 2024. The plunge reflects a confluence of global and domestic factors that shifted investor sentiment from optimism to caution. India’s equity market, already trading at premium valuations, became less attractive amid a global risk-off sentiment. The Federal Reserve’s revised outlook in December 2024, projecting only two interest rate cuts in 2025 (down from four), signaled tighter monetary conditions, further pressuring emerging markets like India. The correction was quite broad-based. Defensive sectors like FMCG, IT, and pharma, traditionally resilient, underperformed the Nifty 50, breaking a decades-long trend amid India’s subdued discretionary consumer spending, weak labor market, and sticky inflation.

Market Performance Context

October 2024: The Nifty fell 8% from its peak, driven by record FII outflows and sectoral divergence (e.g., retailing and industrial gases slumped, while electricals thrived).

November 2024: The index slipped into correction territory (a 10% drop from its high), marking its worst month since March 2020.

February 2025: A 5.89% monthly decline—the steepest since 2020—coupled with a 10-day losing streak, reflected sustained pressure from FII selling and U.S. tariff fears. Mid-caps and small-caps dropped 9.42% and 13.07%, respectively.

Despite the downturn, domestic institutional investors (DIIs) provided a cushion, with net purchases of Rs 0.51 Trillion in February 2025 and consistent SIP inflows (Rs 2.42 trillion from January to November 2024), helping limit the Nifty’s fall from being even steeper.

Challenges: Persistent FII outflows, U.S. tariff implementation risks, and a sluggish earnings recovery suggest continued volatility. Support Levels:

Potential Catalysts: Increased government spending in H2 FY25 and FY26 and stabilization in global trade tensions could provide a lift.

Long-Term Outlook (End of 2025):

Risks: Escalating geopolitical tensions, a sharper-than-expected rupee decline, or sustained inflation above 5% could cap gains.

And too much hawkish approach by RBI and India’s too much borrowing costs for too long is affecting the overall economy and the stock market.

The Nifty’s 15% plunge from October 2024 to February 2025 was primarily driven by massive FII outflows, global trade uncertainties, and slowing earnings, with secondary pressures from a domestic slowdown, sectoral overvaluation, and geopolitical risks. While the near-term outlook remains cautious due to lingering global and domestic headwinds, historical Chart patterns (time & price) and robust domestic support suggest a gradual recovery through 2025.

Overall Nifty slumped almost 15% in the last five months on India’s worsening macros and growing political & policy paralysis coupled with subdued earnings growth and an escalating Trump trade war tantrum. Modi 3.0 may be more preoccupied with politics and tariffs rather than appropriate policies to bring the economy from slumber.

India’s discretionary private consumer spending is subdued, affecting overall economic activities due to the skyrocketing cost of living. There has been no price stability in India for at least the last 20 years under both UPA and NDA despite elevated borrowing costs. The average headline CPI is around +5.0% for the last two decades, which means over 100% price rise in the last two decades.

Also, average food inflation in India is around +10.0%, which translates to over 200% price rise of day-to-day food items in the last twenty years on average. This along with increasing costs of fuel/transport, various taxes in the name of development, higher costs of healthcare/medicines, private education, and housing/rents, the minimum comfortable cost of living in India is now around almost INR 87000-105000/M; i.e. over $1000-1200/M for a small family of three (middle-class household). This is against average gross earnings of INR 60000/M for a middle-class household in India.

Moreover, over the last few years, especially after COVID, both Federal and State governments have increased/modified various GST rates for both day-to-day items & services and so-called luxury items & services. The present format of GST is very complex and rates are also on the higher side, resulting in higher costs of goods & services and subdued consumer spending.

In summary, India's economic slowdown is multifaceted, driven by internal policy challenges, declining consumer confidence, subdued private investment, agricultural distress, and adverse global conditions. Addressing these issues will require comprehensive policy reforms aimed at revitalizing growth and restoring investor confidence. To address the slowdown, India needs a multi-pronged approach that includes addressing structural inefficiencies, implementing growth-friendly structural policy reforms, boosting private investments, and fostering innovation and exports. Immediate measures to improve rural demand, ease inflationary pressures, and enhance job creation are critical for long-term growth recovery.

India’s RBI has failed to bring down headline CPI even below 4.0% targets consistently despite ensuring higher borrowing costs. India’s food inflation has been running around 10% for the last two decades, resulting 5% average headline CPI. Also, India has a larger informal and black economy (corruption out of government money/projects and bank finances), which is making RBI tightening policy ineffective.

The need of the hour is low inflation/price stability as without price stability, no economy can function smoothly. In any way, if Indian headline CPI comes to around 5% consistently, then India’s real GDP growth should be targeted at a minimum of +10.00% rather than 6.5% to produce enough quality jobs for ten million educated youths every year; otherwise, there may be social unrest in the coming days and India may soon become a banana Republic.

Trump has threatened to impose reciprocal tariffs, meaning if India taxes US goods at a certain rate, the US will tax Indian goods at the same rate. He has criticized India's high tariffs on American products, sometimes as high as 100% or even 200%!

Conclusions:

The market is still expecting good cooperation between Trump’s MAGA (Make America Great Again) and Modi’s MIGA (Make India Great Again). But now relation between Modi and Trump is not as good as we have seen during Trump 1.0; Modi may have miscalculated the probability of Trump 2.0 in his last US visit just before the US election and avoided calling/meeting Trump personally despite Trump's invitation. This, along with the Adani saga in the US and recent White House humiliation by Trump & Co., India’s PM Modi may be on the back foot now, while Trump is flexing muscle from tariffs to techs. Modi’s weakness and spineless attitude towards the ill-treatment of illegal Indian immigrants show that Modi is ready to make a deal with Trump at any cost and thus Indian tariffs on US goods may be reduced drastically, paving the way for an eventual trade deal between the US and India.

Although it’s not clear that Tariff King India will reduce tariffs drastically on all countries including China in the coming days, if it happens, it would be good for the Indian consumers and economy as domestic producers will also have to improve their efficiencies and decrease cost. The Indian Federal and state governments also have to formulate proper policy reforms in place, so that domestic producers can compete with foreign producers. This may help in restoring price stability and bring down the elevated cost of living in India. Lower price stability and improved productivity are the ultimate for any economy, including India.

Indian politicians and policymakers need to ensure proper policy to restore price stability of at least around 3% core CPI inflation and real GDP growth of around 8-10% on a sustainable basis for maximum inclusive quality employment to boost domestic consumption. India has to improve its productivity significantly along with lower price stability and double-digit growth to become a developed economy by the next 25-60 years. Nifty is under stress as the market may not now trust in Modinomics, unlike in past years. Indian PM Modi has now an adequate political majority to unleash various policy reforms to make India great again. But Modi may not be so much interested in key policy reform despite growing political consolidation in the last few months.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (22500) has to sustain over 22900/23000 for any further recovery to 23600/23850-24000/24200*-24400/24600 and a further rebound to 24700/25050-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 22850, it may again fall to 22400/22300-22100/21900 and 21800/21250-20900/20450 and 19800/19600-17650/16700 in the coming days.