Globally, as well as at home, the Street’s battling the aftermath of US President Donald Trump’s tariff tantrums. Continuing the decline seen in June, the Nifty fell nearly 3% in July. As the month wrapped up came a fresh salvo…from the US. Months after a deadlock in negotiations, US President Trump slapped a record 25% tariffs on Indian imports into the US. A week later itself, the tariffs doubled to 50%, in the wake of India’s resistance. While it remains to be seen as to how the Indian government responds, the US’s moves rattled Indian equities severely.

Besides the Trump tantrums, lacklustre Q1FY26 corporate earnings, rapid decline in FPI inflows and overall cautiousness among investors dented the market rally. Market capitalisation of listed companies on the BSE plunged sharply versus many global peers by almost 3.6%, the largest monthly decline since February this year, to $5.2 trillion from $5.38 trillion.

So is the tariff story over? Markets do not seem to have fully discounted the impact of the US tariffs. For now, export-oriented sectors such as ITeS, textiles, capital goods, pharmaceuticals, and auto components would take most of the heat. Though the revised tariffs are steeper versus Asian peers such as China and Bangladesh, the overall impact on India is expected to be limited due to our relatively low exposure to US exports.

Still, given the unpredictability on what Trump would do next, concerns stay on how the country’s economic growth prospects could be hit, especially given that the Indian government plans retaliatory measures against the US’s moves. What gives some comfort is that the RBI has retained its 6.4% growth outlook, buoyed by robust services activity and infrastructure investment.

The tariff story apart, India Inc’s Q1 earnings scorecard has been uninspiring as numbers revealed pressure on topline due to weak demand, even as softer input costs and sharper cost controls aided bottomline performance. And now, given Trump’s salvos, expectations of an earnings revival are also bleak. What adds to the stress are the steady FII outflows that turned red in July 2025, owing to a strengthening US Dollar and the US’s reciprocal tariffs.

After offloading Indian stocks worth Rs. 47,667 crore in July, FPIs have already pulled out over Rs. 15,950 crore in August so far and are likely to continue selling. However, an improving growth differential between India and the US may aid capital inflows. Interestingly, it is worth noting that while FIIs are pulling out of the secondary market, they are active in the primary market, given that 40 IPOs were launched in July.

All hope lies on any negotiations during the three-week buffer period until August 27, when the 50% tariff rate kicks in. While as of now, sectors such as textiles, jewelry, auto ancillaries could be hurt, the broader economic sentiment remains intact. Easing domestic inflation, the RBI’s renewed growth focus and improved system liquidity would support strong growth.

Overall, with a heady mix of tariff tantrums, geopolitical tensions and uncertain earnings, can one hope for a sustained turnaround in H2FY26? In such a scenario, we believe that investors could stick to large-caps given their reasonable valuations.

Happy Investing!