- Tariff announcements trigger immediate market swings, but the long‑term trend still follows earnings growth.
- India’s 8%+ GDP growth masks a sharp slowdown in corporate earnings – a warning sign for equity investors.
- Historical trade‑war cycles suggest that policy shocks are temporary; fundamentals reign supreme.
- Sector winners (defense, commodities) and losers (consumer discretionary, tech) are being re‑priced.
- Positioning for a post‑tariff rebound can lock in upside while limiting downside.
You ignored the tariff headlines and paid the price – that mistake can be undone.
Why Trump’s Tariff Volatility Is a Red Flag for Global Markets
The April 2025 announcement of reciprocal tariffs set off an instant sell‑off across major indices. Even though bilateral deals later muted the worst‑case scenario, the market’s reaction proved a simple truth: policy‑driven noise creates short‑term volatility that can erode portfolio value if you’re on the wrong side of the trade.
Two dynamics are at play. First, the “weaponization of tariffs” has become a recurring policy tool, meaning each new announcement carries a built‑in risk premium. Second, the U.S. Supreme Court may deem reciprocal tariffs illegal, adding legal uncertainty to the mix. Both factors keep the risk‑on sentiment on a tight leash, especially for export‑heavy equities and commodities that depend on stable trade flows.
India’s Growth Paradox: High GDP, Stalled Earnings
From FY22 to FY26, India posted an impressive 8.1% average annual GDP growth, outpacing all other large economies. Yet corporate earnings tell a different story. After a 24% compound annual growth rate (CAGR) in FY21‑FY24, earnings have dwindled to a modest 5% CAGR in FY25, and projections for FY26 remain subdued.
This divergence stems from three forces:
- Base‑effect inflation: Low CPI in FY25 trimmed nominal GDP growth to 8.1%, below the budget’s 10.1% target, squeezing profit margins.
- Supply‑chain disruptions from tariff threats increased input costs for manufacturers.
- Consumer sentiment lagged, especially in discretionary sectors, as uncertainty persisted.
When earnings growth stalls, the equity market’s rally stalls with it. The takeaway for investors is clear: watch earnings momentum more closely than headline GDP numbers.
Historical Echoes: Trade Wars Then and Now
The 2018‑19 U.S.–China tariff cycle provides a playbook. Initial tariff shocks drove a 10%‑plus decline in global equity indices, but markets recovered once a “phase‑one” agreement was signed. The recovery was powered by the same fundamentals that were temporarily obscured: corporate earnings, consumer spending, and resilient supply chains.
Lesson: policy turbulence is often a blip. The underlying economic engine—growth, profitability, and cash flow—remains the true driver of long‑term returns.
Sector Ripple Effects: Who Gains, Who Loses?
Tariff noise redistributes capital across sectors. Defenders of national security (defense, aerospace) and raw material producers (energy, mining) tend to benefit from heightened geopolitical risk, as governments boost spending. Conversely, technology firms reliant on cross‑border R&D, and consumer‑discretionary companies face headwinds from higher import costs and muted demand.
Within India, the top‑line story is the same: exporters such as steel and chemicals see margin pressure, while domestic infrastructure firms receive a policy tailwind through increased public spending aimed at offsetting trade‑related slowdown.
Investor Playbook: Bull vs Bear Scenarios
Bull case: If the Supreme Court curtails reciprocal tariffs and diplomatic channels resolve the Greenland dispute, the volatility premium will evaporate. Earnings growth should resume in FY27 as nominal GDP re‑accelerates, supporting a moderate equity rally. Positioning for upside includes:
- Increasing exposure to high‑quality Indian conglomerates with diversified revenue streams.
- Adding defensive sector ETFs (defense, utilities) that historically outperform during geopolitical stress.
- Maintaining a modest allocation to global commodities to capture any price spikes from supply concerns.
Bear case: If tariff litigation drags on or new trade barriers emerge, corporate earnings could remain flat or dip further. In that environment, risk‑off assets such as sovereign bonds, gold, and cash‑equivalents become attractive. Defensive moves include:
- Scaling back exposure to export‑sensitive Indian equities.
- Shifting capital to high‑dividend, low‑beta stocks that can deliver stable cash flow.
- Utilizing options strategies (e.g., protective puts) to hedge against sudden market drops.
The core principle remains unchanged: stay invested, but stay selective. Markets have a “climb‑the‑wall” ability—temporary policy scares fade, but the economic foundation endures.
Bottom Line: Focus on Fundamentals, Not Flash
Geopolitical noise will keep markets jittery, but the long‑run is still dictated by earnings, growth, and cash generation. By anchoring your portfolio to companies with solid balance sheets, diversified revenue, and a clear path to earnings recovery, you can weather the Trump‑induced turbulence and capture the upside when the storm passes.