Easing Trade Anxiety Sparks A Recovery, But Can It Last? 

The sudden market optimism that followed a de-escalation in global trade tensions feels more like a respite than a turning point. The US-China trade agreement and a ceasefire understanding between India and Pakistan have spurred a partial recovery in Indian equities. Yet, beyond the relief rally lies a deeper, unresolved concern: weak fundamentals, stretched valuations, and a global trade order in flux. 

Indian markets have clawed back over half of the ₹92 trillion lost since mid-2024. But even with this rebound, the net erosion of almost ₹43 trillion—or 21% of household income—remains daunting. 

Hence, this recovery, driven less by structural strength and more by event-led sentiment shifts, needs to be backed by sustained earnings growth and policy clarity for its sustenance.

Trade Reset  
While geopolitically significant, the impact of Indo-Pak ceasefire understanding on the market is limited. The more consequential development is the recalibration of the US-China tariff regime. The Geneva negotiations brought a rollback of reciprocal tariffs from 34% to 10% on for both the US and China, lowering average effective tariffs to around 32%. This marks a retreat from the trade embargo stance of Trump 2.0, re-aligning with the earlier Trump 1.0 posture. 

Symbolically, the climbdown reflects Washington’s quiet acknowledgement of the limits of economic coercion. Trump’s admission that the 145% tariff against China was ‘impractical’ and his pivot towards a “big, beautiful rebalancing” signal a US retreat.  

With China holding firm and diversifying away from US trade dependence, the outcome strengthens Beijing’s position in the Global South and erodes the credibility of the US as an anchor of global trade policy. Moreover, it is apparent that Trump 2.0 objectives of bringing back manufacturing to the US and taming the burgeoning public debt are unlikely to be met.

This new normal of tariffs hovering above 30% does not mark a return to free trade. Rather, it institutionalises a decoupling regime. While this avoids a severe recession, it still drags on global growth.  

The US trade deficit with China has halved since 2018, but at a cost. China’s pivot to non-US markets and ongoing fiscal tightening in the US create spillovers that may prove more damaging to emerging markets than to China itself. While US trade deficit with China has declined by $123 billion since 2018, for the rest of the world, it rose by $455 billion to $907 billion. 

Worse, the erosion of American trade leadership strengthens global de-dollarisation efforts and weakens the rules-based order. The economic impact will play out unevenly, but few economies will be spared.

Growth Drag
Markets are celebrating the short-term relief. The CBOE VIX index fell to the long-term average of 19 from 26 a week ago, global equities gained by 2-4%, crude oil rose by 3%, and the US yield curve steepened. The dollar index also saw some reprieve, while safe haven gold softened by 3%. 

Yet, the apparent reflation is undercut by persistently high US risk-free rates and a tariff regime still 3.5 times higher than the pre-Trump 2.0 average. Growth slowdown expectations, particularly for non-China economies, remain high.

India’s outlook, while supported by a 12% rise in Nifty 50 valuations from April lows, is fragile. Much of this rally has been fuelled by revival in Foreign Portfolio Investment flows, amid perceived cheap valuation of 20x trailing P/E, and hopes that India might benefit from the China-India tariff differential.

The reality, however, is that India’s trade deficit with China has been rising. Meanwhile, the FTA with the UK and expectations of similar pacts with other partners could further intensify competition. Domestic indicators, including weak consumption, tepid private capex, and questionable real GDP growth projections of 6.5%, signal that the ground realities are less favourable than equity markets suggest. 

Corporate earnings reflect this. Across sectors, growth is anaemic or slipping. Downgrades are outpacing upgrades. 
Banks continue to experience slowing lending amid compression of spreads, even as larger ones resort to optimisation to support profits. Asset quality is stable for larger banks but aggravating for smaller ones.

NBFCs are experiencing weakening asset quality, higher slippages, and credit costs for vehicle financiers.

IT companies saw a decline in average revenue, significantly coming from Tier-1 firms, as global uncertainties weigh on 2025-26 guidance.

Automobile sector faces a sharply lower domestic volume growth for passenger vehicles, two-wheelers and commercial vehicles, with tractors performing relatively better. Decline in commodity prices can be a tailwind, but they also face the risk of lower average realisation due to affordability concerns.

Consumer staples have sustained weak volume growth at 3.5%, according to Kantar Research. Sharp deceleration in corporate spending on compensation and rising cost of living are weighing on urban demand. 

Retail companies have demonstrated subdued apparel and grocery demand, even as value retailers outperformed.

Metal companies have seen selective strong performance.

Cement companies saw a revival in January-March performance due to higher infra spending by the government following a weak few quarters, but price realisation declined.

Nifty 50 earnings are now expected to average at 5-6% over the medium-term vs 4-5% in 2024-25. Compare that with the 2020-24 average of 20%, and the compression is stark. 

Valuation Risk 
Despite these fundamentals, market valuations remain elevated. The Nifty 50 trades at 22.4x, with mid- and small-cap indices trading at premiums of 78% and 36%, respectively. The price-to-earnings growth ratio is uncomfortably high at 4.5-5.5x. 

Flows offer no reassurance. While FIIs have turned net buyers in recent weeks, domestic retail participation appears to be slowing down. Net purchases of DII in the equity market fell sharply in April to ₹282 billion or 72% from the October 2024 peak. It coincides with the 42% decline in mobilisation of open-ended mutual fund equity schemes to ₹242 billion. 

Mutual fund SIPs also showed worrying signs: new SIP registrations declined by 20%, and discontinuations surged to 13.7 million. The net fall of over 9 million SIPs marks the steepest drawdown since 2021, revealing how valuation erosion has scarred smaller investors.

Moreover, the chase for alpha in thematic and sectoral funds has intensified the downside. As sectors like Media, Energy, PSE, Realty, high beta Capital Goods and IT face sharper corrections, large-cap indices have outperformed.

For the recent recovery to evolve into another boom, a) revival in FII flows should extend into a sustainable buoyancy, b) global financial conditions should be supported by aggressive easing by the Fed, and c) a meaningful growth revival is critical. 

Each of these drivers is riddled with uncertainty. Trade disruptions could reignite inflation, complicating the Fed’s job. Fiscal headroom globally is limited, and domestic consumption remains tepid. Even softening crude prices, while welcome, may simply reflect slowing global demand, which is not a net positive. 

The rebound in Indian equities is no foundation for complacency. The tariff truce may have averted the worst, but it has not undone the deeper fault lines of weak global growth, fragmented trade, and high-cost capital. India’s own earnings outlook, already under pressure, is unlikely to support sustained outperformance, especially amid declining retail enthusiasm and inflated valuations. 

Unless backed by a clear growth pivot and favourable global liquidity, this recovery risks becoming just another rally in a bear market. The real question is not whether sentiment has improved, but whether it has improved enough to revive the plummeting investor participation.