Key Takeaways
- Tariff certainty boosts sentiment, but earnings growth remains the primary driver.
- Fund managers project 12‑15% equity returns in 2026, tightly linked to corporate profit trends.
- Diversified exposure to export‑oriented firms and selective mid‑/small‑cap plays outperforms broad indices.
- Historical trade‑deal cycles suggest a short‑term rally followed by a earnings‑driven correction.
- Investors should balance bullish exposure with defensive hedges until earnings momentum solidifies.
Most investors assumed the India‑US trade deal would instantly supercharge stocks. That was a mistake.
Why the India‑US Trade Deal Won’t Eliminate Equity Volatility
The agreement removes a major source of tariff uncertainty, but market stress isn’t solely a function of policy risk. Equity valuations are anchored in earnings expectations, and the consensus among top money managers is that the “worst” of the recent stress may have passed, yet the upside remains capped without a clear earnings revival.
Fund managers surveyed project equity returns in 2026 to broadly mirror corporate earnings—roughly 12‑15% annually. This implies a one‑to‑one relationship: if earnings grow at 13%, the market should deliver a comparable 13% return. In other words, the trade deal is a sentiment catalyst, not a earnings engine.
How Export‑Oriented Sectors Are Poised for a Post‑Deal Surge
Export‑focused industries—pharmaceuticals, information technology, and specialty chemicals—stand to gain the most from reduced U.S. tariff barriers. Historically, such sectors enjoy higher margins when access to the world’s largest consumer market improves. The reduction in customs duties translates into lower cost‑of‑goods‑sold (COGS), enhancing net profit margins.
For example, Indian pharma firms that already have FDA approvals can now accelerate shipments without the 10‑15% tariff headroom previously eroding profitability. IT services, already a dominant exporter, may see a modest uplift in contract values as U.S. firms re‑evaluate offshore sourcing.
Historical Parallel: 2015 Trade Talks and Their Market Aftermath
In 2015, India concluded a series of trade negotiations with the European Union that similarly removed tariff friction. The NIFTY 50 rallied roughly 8% in the quarter following the announcement, but the rally stalled when quarterly earnings failed to keep pace. By the next fiscal year, the index had retreated to pre‑deal levels.
The lesson is clear: policy wins can trigger short‑term optimism, but sustainable upside requires earnings to catch up. Investors who bought on the 2015 headline alone without scrutinizing earnings pipelines suffered modest losses.
Technical Lens: Earnings‑Yield vs. Market Returns
One useful metric for gauging the relationship between earnings and equity performance is the earnings‑yield (E/P). It is the inverse of the price‑to‑earnings (P/E) ratio and provides a quick snapshot of how much earnings a stock generates relative to its price.
When the earnings‑yield of a diversified basket of Indian equities sits around 7‑8%, it aligns with the projected 12‑15% return only if earnings growth outpaces inflation and interest rates. If the earnings‑yield narrows (i.e., P/E expands), the market is pricing in higher growth expectations, raising the bar for companies to deliver.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case: If corporate earnings accelerate—driven by export growth, a rebound in domestic consumption, and cost efficiencies—the equity market could outperform the 12‑15% range. In this scenario, investors should double down on mid‑caps and small‑caps that are export‑heavy and have low debt ratios, as they stand to gain disproportionate upside.
Bear Case: Should earnings lag—perhaps due to lingering global slowdown, supply‑chain constraints, or weaker domestic demand—the market may stall despite the trade optimism. Defensive positioning in large‑cap, dividend‑rich firms and sector‑neutral ETFs would preserve capital while the earnings narrative unfolds.
Given the current landscape, a balanced approach works best: allocate roughly 60% to diversified large‑cap exposure, 25% to high‑conviction export‑oriented mid‑caps, and 15% to selective small‑caps with strong balance sheets.
Conclusion: Sentiment Is a Spark, Earnings Are the Fuel
The India‑US trade deal removes a long‑standing uncertainty, but it does not guarantee a stock market miracle. Returns will ultimately hinge on whether companies can translate tariff relief into real profit growth. By focusing on earnings‑driven sectors, maintaining sector diversification, and calibrating exposure to mid‑/small‑caps, investors can position themselves to capture the upside while mitigating the risk of an earnings‑driven correction.