Market taking 25% Trump tariff in its stride after initial knee-jerk reaction: Gautam Duggad

Economic Times

2 days ago

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, Head Of Research, Director - Institutional Equities at, says the market's reaction to the 25% tariff imposed on India by Trump is muted, with only a slight dip, as the full impact remains to be seen. While textiles face the brunt, sectors like pharma, metals, and IT remain largely unaffected. Despite a minor cut in forward earnings, overall earnings growth remains in line with expectations.Yes, and so far as tariffs is concerned, this news has been there for three-four months now. The reaction of the market is very muted, just half a percent down. So, I do not know how to look at it in the short term because a lot of things are still to unravel. I am sure the Indian government will also react. We have not seen the last of it yet given the way the US has repeatedly changed its stance on this matter. So, let us wait it out for a few days and see if there are more twists and turns.The sector-specific impact will be there depending on which sector gets hurt more. We do not cover textile, but clearly textile seems to be bearing the brunt of it. We will have to see what they do to pharma because as of now, pharma is not impacted, metals are not impacted, financials are not impacted, consumer is not impacted, IT is not impacted and cement is not impacted. Some indirect impact could be there for some of these sectors. It is very difficult to pencil in a specific quantifiable measure that post this tariff, X, Y, Z percent will be the impact on the earnings and this is how the PE will contract. That will evolve as we move forward.Clearly, 25% seems to be slightly higher than what most people have been working with. But the market is taking it in its own stride, given that this has become too recurring an issue now and the market has moved beyond some of these exogenous factors and people are focusing on the stock where things are in their control and looking at the portfolio from that point of view.I do not agree with the point that earnings have done nothing. So far 132 companies in our coverage have reported numbers. It is a 10% growth which is in line with expectations. Yes, the forward earnings have got cut by a percent, percent-and-a-half. So, while we were expecting about 11% Nifty EPS growth for FY26 when the quarter began when we published our preview three-four weeks back. As we speak, that 11% growth has come down to 9.5%. But there is too much of a narrative that earnings are bad. If you look at sector by sector, stock by stock, and then aggregated it, the numbers are in line with expectations.One thing which we have learned repeatedly in the markets over the last decade-and-a-half is that the only thing the stock markets respect over a period of time is corporate earnings. FY20 to FY24, we added 20% plus corporate earnings growth , in fact 30% for Nifty 500. You saw phenomenal stock market returns depending on which index you look at. In the last one year, earnings growth has been absolutely tepid. FY25 saw flattish earnings in Nifty, 3-4% growth in broader markets and markets have done absolutely nothing.If you look at point-to-point returns of the last 12 months, we have gone all over the place and ended up nowhere. Clearly all these factors – rump, tariffs, geopolitics, wars, other headwinds, will come and go. The only thing which will matter for the market from a one- to three-year perspective will be the corporate earnings. We are hopeful that this year will be slightly better than last year.Plus, the government and RBI have taken a series of measures on income tax cuts, rate cuts, and liquidity. So, let us see. After a couple of months, the tailwinds from those steps that the government and RBI have taken may manifest in better high frequency indicators with the advantage of a very good monsoon and festive season beginning to start from September. So, I would think that while valuations are expensive for midcaps and smallcap indices, the growth is also there in mid and smallcaps.Last year, while the broader markets grew at 3%, midcaps earnings in our coverage grew at 10%. This year we are pencilling in an 8-10% earnings growth for largecaps and 20% for midcaps. In our model portfolios, we have further increased the component and allocation of midcaps from 24% to 31%, and consequently, we have brought down the weightage of largecaps in our model portfolio across sectors.