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The Indian equity market's July initiation witnessed a pronounced selling pressure, predominantly fueled by the relentless undertow of global trade tensions and a conspicuously subdued commencement of the Q1FY26 earnings season. Investor sentiment, already fragile, was further undermined by protracted delays in the eagerly anticipated India–US trade pact and the US administration's extension of tariff deadlines. The announcement of a 35% levy on Canadian goods, a 50% tariff on copper imports, a 25% duty on Japanese products, and the dissemination of tariff threat letters to twenty countries collectively amplified existing anxieties. These geopolitical and economic factors converged to create a challenging environment for the Indian stock market, prompting investors to reassess their positions and adopt a more cautious approach. The combination of trade war fears and disappointing initial earnings reports from key companies underscored the vulnerability of the market to external shocks and internal performance issues, leading to a broad-based decline in stock values and a general sense of uncertainty among market participants. This initial wave of selling pressure highlighted the interconnectedness of global trade dynamics and domestic market performance, emphasizing the need for investors to carefully monitor international developments and their potential impact on the Indian economy.
Amidst the pervasive negativity that engulfed the broader market indices, a discernible pattern of selective buying emerged, particularly within consumption-oriented sectors such as Fast-Moving Consumer Goods (FMCG) and discretionary stocks. This targeted investment activity was underpinned by a confluence of positive signals emanating from the Indian economy, including tangible signs of urban and rural demand revival, a gradual easing of inflationary pressures, a consistent decline in interest rates, and a favorable monsoon season. These factors collectively contributed to margin improvement for companies operating in these sectors, fostering a positive undertone regarding volume growth and overall business prospects. The resilience of the consumption-oriented sectors served as a counterpoint to the broader market downturn, indicating that certain segments of the Indian economy were proving to be more resistant to the negative effects of global trade tensions and lackluster earnings reports. This selective buying behavior suggested that investors were actively seeking out opportunities in sectors that demonstrated strong fundamentals and growth potential, even amidst a generally unfavorable market environment. The focus on FMCG and discretionary stocks highlighted the importance of domestic demand as a key driver of economic activity and the ability of certain companies to capitalize on favorable economic conditions to achieve sustainable growth.
Conversely, the Information Technology (IT) sector emerged as a significant underperformer, weighed down by the disappointing results reported by key bellwethers and the prevailing expectations of deferred orders and investments. The combination of weak financial performance and cautious forward guidance from leading IT companies raised serious concerns over the viability of FY26 earnings estimates and intensified existing valuation pressures. Investors are now closely scrutinizing corporate guidance on margins and sector dynamics as the earnings season unfolds, seeking clarity on the future prospects of the IT sector and its ability to navigate the challenges posed by a changing global economic landscape. The underperformance of the IT sector underscored the importance of technological innovation and adaptability in maintaining competitiveness and achieving sustainable growth in an increasingly dynamic and competitive global market. The challenges faced by the IT sector also highlighted the potential impact of macroeconomic factors, such as trade tensions and currency fluctuations, on the performance of export-oriented industries. The focus on corporate guidance and sector dynamics reflected the growing emphasis on fundamental analysis and the need for investors to carefully assess the long-term prospects of companies operating in a challenging and uncertain economic environment.
Following the initial setback, the prices of IT stocks are showing signs of stabilisation, accompanied by a reduction in volatility. This stabilisation can be attributed to deep value trading near 5-year -1 standard deviation forward Price-to-Earnings (P/E) valuation, indicating that IT stocks may be undervalued relative to their historical performance. There is also a glimmer of hope for a rebound in business in Calendar Year (CY) 26, fueled by the NASDAQ100 index reaching an all-time high. The stabilisation of IT stocks suggests that investors are beginning to recognize the long-term potential of the sector and are willing to overlook short-term challenges in anticipation of future growth. The deep value trading signals that IT stocks may be an attractive investment opportunity for value investors seeking undervalued assets with significant upside potential. The NASDAQ100 reaching an all-time high indicates that the technology sector, in general, is experiencing strong growth and investor confidence, which could have a positive spillover effect on the Indian IT sector.
Banking stocks, on the other hand, are exhibiting a muted trend, which is expected to persist in the short term. The sector is facing headwinds from Net Interest Margin (NIM) contraction and sluggish growth in advances, which could negatively impact its profit performance. Furthermore, the valuation of banking stocks appears somewhat stretched at current levels, suggesting that the upside may be limited in the near future. However, with regulatory support such as liquidity infusions and other revival measures, the banking sector is expected to recover over the medium to long term. We continue to maintain a positive outlook on the industry, and back stocks with a moderate credit-to-deposit ratio and improvement in asset quality, which provide a cushion against short-term volatility. The muted trend in banking stocks reflects the challenges facing the sector, including regulatory uncertainty and increased competition. The NIM contraction and sluggish growth in advances highlight the need for banks to improve their operational efficiency and diversify their revenue streams. The stretched valuation of banking stocks suggests that investors should exercise caution and carefully assess the risks and rewards before investing in the sector.
Markets attempted a partial rebound this week, driven by optimism over a potential interim trade deal with the U.S. and multi-year low domestic inflation, which boosted hopes of RBI rate cuts and economic acceleration. However, the continuation of subdued quarterly results, the clamp in the global market, and the premium valuations of India led to further losses in the market. Investors are adopting a selective approach, focusing on earnings visibility and sector resilience. Mid & Small cap were able to perform marginally better. The attempted rebound underscores the market's sensitivity to positive economic news and geopolitical developments. The optimism surrounding a potential trade deal with the U.S. and the low domestic inflation rate suggests that there is potential for future economic growth. However, the continuation of subdued quarterly results and the premium valuations of India highlights the need for caution and careful analysis.
The key intake of the month is that India’s macroeconomic outlook remains strong, supported by easing inflation, lower interest rates, a healthy monsoon, and softer oil prices. A drop in inflation in eight straight months has provided an optimism to the market. However, investors are showing a mix of optimism and caution to assess the Q1FY26 corporate earnings, as an upgrade in earnings is the most essential fact in the premium-valued stock market. The positive macroeconomic outlook provides a solid foundation for future economic growth. The easing inflation, lower interest rates, healthy monsoon, and softer oil prices are all positive indicators that should support business investment and consumer spending. However, the cautious approach of investors highlights the importance of corporate earnings in driving market performance. An upgrade in earnings is essential to justify the premium valuations of Indian stocks and to sustain the market's upward momentum. The long-term health and stability of the Indian stock market depends on the ability of companies to generate sustainable earnings growth.