U.S. tariff impact: India sees Asia's biggest earnings downgrades

Indian companies are facing the sharpest earnings downgrades in Asia, with forward 12-month estimates cut by 1.2% due to heightened risks from steep U.S. tariffs, exacerbating a period of single-digit earnings growth. While domestic tax reforms are expected to partially offset this by boosting GDP, the tariffs could reduce overall growth by 1 percentage point, leading to India becoming a least-preferred Asian equity market and potentially triggering a broad valuation re-rating downwards for still-elevated equities.

Analysis

Indian corporate earnings are under significant pressure, experiencing the sharpest downgrades in Asia with forward 12-month estimates cut by 1.2% in the last two weeks. This revision follows five consecutive quarters of single-digit earnings growth, a notable deceleration from the 15%-25% growth seen between 2020 and 2024. The primary catalyst for the downgrades is the imposition of U.S. tariffs of up to 50%, which, according to MUFG analysis, could reduce India's GDP growth by 1 percentage point over time, despite the Nifty 50's relatively low direct revenue exposure of 9% to the U.S. In response, the Indian government has proposed sweeping tax cuts to bolster domestic consumption, which Standard Chartered estimates could add 0.35-0.45 percentage points to GDP in fiscal 2027. This macroeconomic uncertainty has triggered a dramatic shift in investor sentiment, with a Bank of America survey indicating India has fallen from the most-favoured to the least-preferred Asian equity market in just two months. J.P. Morgan Asset Management notes that currently elevated valuations could face a broad downward re-rating, potentially creating value in domestically-oriented stocks as the market digests a sluggish earnings recovery and a moderated GDP growth projection of 6.8% for the next three years.

Key Decisions for Investors

• Given the significant earnings downgrades and tariff-related risks, investors should reassess exposure to sectors with the deepest estimate cuts, including automobiles, capital goods, and consumer durables.
• The sharp negative shift in fund manager sentiment suggests a cautious or underweight positioning on Indian equities may be warranted until there is greater clarity on the net impact of U.S. tariffs versus domestic fiscal stimulus.
• Investors should monitor for a potential valuation re-rating, as a market-wide correction could present attractive entry points in domestically-focused companies that are more insulated from trade disputes.
• Closely track the implementation and efficacy of the proposed domestic tax cuts, as their ability to successfully stimulate consumption will be a key driver for future market performance and could offset some of the external headwinds.