Sensex, Nifty rally over 12% in April: Is Indian stock market being too optimistic as real risks linger?

Indian stock market today: A wave of optimism has lifted the Indian stock market in April, with the Nifty 50 and Sensex gaining over 12% from their April lows, while the broader markets also staged a strong comeback, with the Nifty Smallcap 100 index gaining 19.25% from its April 7 lows and the Nifty Midcap 100 index soaring 16.45%.

While optimism over macroeconomic resilience and policy support has fueled a rebound, analysts caution that underlying challenges — from unresolved tariff disputes and a slowing global economy to persistent earnings downgrades — still linger beneath the surface. 

What's behind Indian stock market rebound?

Domestic brokerage firm Kotak Institutional Equities attributes the recent rebound to a degree of complacency in the market. The fact that the Indian stock market is trading above 'Liberation Day' levels suggests that all issues have been resolved.

However, the brokerage notes several ongoing challenges, including expectations of lower global and domestic GDP growth, prolonged resolution of reciprocal tariff and trade issues, further earnings downgrades, and continued rich valuations across sectors and companies — with even large-cap financials approaching fair value.

Kotak doubts that trade agreements can be negotiated between various countries (including India) and the US over the remaining 75 days before the 90-day period from April 9 expires.

For now, most countries are on an equal footing on tariffs on their exports to the US, and there is no clarity on the final tariff levels and related issues (non-tariff barriers). It notes that the US has already imposed a 10% reciprocal tariff on all imports (higher on China and certain products, with exemptions on some others).

High hopes: India and US trade issues

There seems to be a fair degree of belief and hope that India will be a relative beneficiary of tariffs and trade whenever the US is in a position to complete its tariff and trade arrangements with various countries.

According to the brokerage, the level of final reciprocal tariffs for India (10%, 26%, or any other in-between figure, as the case may be) may be a lesser issue versus non-tariff issues, and India’s trade surplus with the US can decline over time, if not immediately.

The Street generally believes that India will be in a decent position to reduce its trade surplus with the US by committing to increasing imports of certain items from the US (defense and energy being the most obvious ones).

But the brokerage cautions that defence imports take a long time to finalise, and energy imports could face challenges as other countries like Europe, Japan, South Korea, and Taiwan will also pursue similar strategies and rebalance their trade surpluses with the US through more energy imports.

Moreover, the US has limited spare LNG export capacity. It has increased supplies to Europe in the past few years, with Europe reducing its imports from Russia after the Russia-Ukraine war.

On non-tariff issues, the brokerage says these could be bigger obstacles, especially if the US insists on difficult obligations like greater access for US companies in financial services, retail, and agricultural imports.

According to the brokerage, it would be difficult for India to allow unrestricted access of agricultural imports and permit retailing by FDI entities without any restrictions, from a political perspective.

Street too optimistic on earnings outlook

The brokerage believes the Street is being too optimistic on earnings estimates. It sees two differences versus its view: the Street may be too bullish on revenues of export-oriented sectors like automobiles, IT services, pharmaceuticals, and specialty chemicals, given uncertainty on global GDP growth and US tariffs and the Street may be too optimistic on profitability of consumption companies by assuming they can retain benefits of lower raw material prices.

On revenues, it highlights that high tariffs will hurt automobile companies like Bharat Forge and Tata Motors and that delayed client decision-making could impact IT services revenues. It notes that IT stock valuations are well ahead of pre-pandemic levels and do not factor in a deep US slowdown or recession.

On profitability, it cautions that while lower input costs may help, increased competition across categories makes it harder for companies to retain gains. Companies may cut prices to gain market share, hurting margins. As an example, HUL, in its 4QFY25 commentary, expects gross margins to moderate and lowered EBITDA margin guidance, focusing more on volume growth than profitability.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.