Will the Stock Market Rally Last? Q4 Results Hold the Answer, Says Vinod Nair

In recent weeks, the U.S. stock market faced a sharp and rapid correction, with major indices experiencing significant declines. The S&P 500 dropped by 10%, while the tech-heavy Nasdaq 100 saw an even steeper fall of 14%. This downturn was driven by a combination of factors, including concerns over interest rates, economic growth, and global uncertainties, leading to a broad-based sell-off in equities.

Despite this volatility in global markets, India’s stock market demonstrated remarkable resilience. While many international indices struggled, the Nifty 50 managed to recover swiftly from its recent low of 21,964.6. The benchmark index not only bounced back but also comfortably surpassed the 23,000 level, signaling strong investor confidence and buying momentum.

By the end of trading on Friday, the Nifty 50 had climbed to 23,350, reflecting a robust 6% month-on-month (MoM) gain. This steady recovery highlights the relative strength of the Indian markets amid global turbulence, supported by domestic factors such as stable economic growth, strong corporate earnings, and sustained investor participation. While global market trends continue to influence sentiment, India’s stock market has so far remained on a firm footing, showcasing its ability to withstand external pressures.

The recent upward momentum in the Indian stock market has been largely influenced by the continued decline of the U.S. Dollar Index (DXY), which measures the strength of the U.S. dollar against a basket of major global currencies. A weakening DXY often indicates a slowdown in the U.S. economy, making emerging markets like India more attractive to investors seeking higher returns.

Over the past few months, the DXY has fallen from a recent peak of 110 to below 104, reflecting a period of economic consolidation in the U.S. This decline has been driven by growing concerns over economic growth, inflationary pressures, and labor market conditions. The Federal Reserve’s latest policy update further reinforced these concerns, as it revised the U.S. GDP growth forecast for calendar year 2025 downward from 2.1% to 1.7%. Additionally, the Fed raised its projections for inflation and unemployment, signaling potential challenges ahead for the U.S. economy.

As a result, global investors have been reassessing their asset allocations, with some shifting focus toward emerging markets like India, which have shown resilience despite global uncertainties. The weakening dollar also makes emerging market assets relatively more attractive, contributing to the Indian market’s continued strength even as global markets face headwinds.

The decline in the U.S. Dollar Index (DXY) has been further influenced by the Federal Reserve’s gradual slowdown in its quantitative tightening (QT) measures. QT is the process of reducing liquidity in the financial system, typically by allowing bonds to mature without reinvesting the proceeds or actively selling assets. However, the Fed has recently scaled back its open market operations (OMOs) related to bond sales, effectively easing the pace of QT.

As the Fed reduces the extent of liquidity withdrawal from the system, the supply of dollars in the market increases, leading to a decline in demand for the currency from global investors. This, in turn, results in a weaker dollar, which benefits non-dollar currencies by making them more attractive in comparison. The depreciation of the dollar has had a positive impact on global markets, particularly in regions like the European Union (EU) and emerging markets (EM), which tend to benefit from improved capital flows and stronger local currencies.

The effect of these monetary policy shifts has already been reflected in key global indices. Over the past three months, the S&P Euro Index has gained 12%, while Hong Kong’s Hang Seng Index has surged by 20%, demonstrating renewed investor confidence in these regions. India, which had been relatively steady, is now also showing signs of following this upward trajectory, as global liquidity conditions and investor sentiment become more favorable for emerging markets.

The tariff policies introduced by former U.S. President Donald Trump, which are expected to continue if he returns to office, are likely to pose economic challenges for the United States in the short to medium term. The U.S. administration appears to be prioritizing long-term economic and strategic advantages, even if it means enduring temporary disruptions in the near future. However, this approach has raised concerns about potential headwinds for the economy, as trade tensions with major global partners escalate.

One of the key concerns revolves around the ongoing trade disputes with China, the European Union (EU), and neighboring countries. Increasing trade restrictions and tariffs could have broader economic consequences, potentially slowing down growth and increasing the risk of a recession by 2026. A notable example of this policy in action is the imposition of a 25% tariff on steel and aluminum imports. While this move is aimed at protecting domestic industries, it has also contributed to a rise in metal prices, adding inflationary pressure to the economy.

Additionally, the tariff rate on Chinese imports has been increased to 20%, which is expected to further elevate inflation within the U.S. economy. Higher import costs often translate into increased prices for consumers and businesses, potentially reducing purchasing power and economic activity. As these trade policies take effect, market participants and economists remain watchful of their broader implications, particularly how they might shape economic growth, inflation trends, and global trade dynamics in the years ahead.

With ongoing disruptions affecting traditional business operations, the U.S. economy faces the possibility of substantial financial losses. These disruptions, fueled by factors such as trade tensions, policy shifts, and global economic uncertainties, have heightened concerns among investors and analysts. As a result, there is growing speculation that the U.S. stock market may experience a correction in the short to medium term, as market participants react to the evolving economic landscape.

Adding to these concerns is the Trump administration’s proposed plan to cut fiscal spending as part of an effort to reduce the national deficit. While deficit reduction is often seen as a long-term economic stabilizer, significant reductions in government spending could slow economic growth by limiting public sector investments, reducing financial support for various industries, and potentially dampening consumer demand.

These combined factors—economic disruptions, potential market corrections, and reduced fiscal support—are contributing to heightened uncertainty in the financial markets. Investors are closely monitoring these developments to assess their potential impact on corporate earnings, market sentiment, and overall economic stability in the coming months.

In the short term, non-U.S. stock markets are reacting positively to the evolving global economic landscape, viewing it as a much-needed boost. Unlike the U.S., where fiscal tightening and trade-related uncertainties are raising concerns, several other major economies are implementing more supportive measures to sustain growth. These measures include increased financial liquidity, higher fiscal spending, and more accommodative monetary policies.

For instance, the European Central Bank (ECB) has taken a proactive approach by lowering its key bank rate to 2.5%, while the U.S. Federal Reserve has maintained its rate at a relatively higher 4.5%. Lower interest rates in the Eurozone aim to stimulate borrowing, investment, and consumer spending, helping to support economic activity.

Meanwhile, China has also begun shifting its economic strategy in response to its prolonged slowdown. In recent years, the Chinese government imposed stringent regulations on private enterprises, particularly in the technology and real estate sectors, in an effort to control the rapid expansion of non-public entities. However, as economic growth continues to slow, the Chinese Communist Party has started easing restrictions, signaling a more favorable environment for private businesses. This shift in policy is intended to encourage private sector participation, boost business confidence, and stimulate consumer spending—key factors needed for economic recovery.

These developments indicate that while the U.S. economy faces certain challenges due to policy shifts and trade disruptions, other major economies are taking a more flexible approach to sustain growth. This divergence in policy direction is influencing global capital flows and investor sentiment, with non-U.S. markets currently benefiting from more accommodative economic strategies.

India’s stock market rally continues to gain momentum, driven by a combination of domestic and global factors that have strengthened investor confidence. One of the key contributors to this upward trend is the changing dynamics of foreign and domestic institutional investments. Foreign Institutional Investors (FIIs), who had been selling Indian equities in previous months, have now moderated their outflows amid the sustained decline in the U.S. Dollar Index (DXY). A weaker dollar typically makes emerging markets like India more attractive, as it reduces the relative cost of investing in these economies. At the same time, Domestic Institutional Investors (DIIs) have remained consistent in their buying, providing strong support to the market and helping absorb selling pressure.

Additionally, the Indian stock market had been in a consolidation phase for the past six months, largely due to a slowdown in corporate earnings. This period of correction brought stock valuations down from previously elevated levels to align more closely with their long-term historical averages. As a result, the market has become more appealing to investors looking for value opportunities.

Macroeconomic indicators have also turned increasingly favorable, signaling a resurgence in business activity. Key data points, such as the Index of Industrial Production (IIP) and the Purchasing Managers’ Index (PMI), have shown strong monthly growth, reflecting improved industrial output and manufacturing expansion. Moreover, inflation has moderated, and crude oil prices have seen a decline, both of which are positive developments for the Indian economy. Lower inflation enhances consumer purchasing power, while reduced crude prices help ease cost pressures on businesses and the fiscal deficit.

Looking ahead, monetary policy is expected to play a crucial role in sustaining economic growth. The Reserve Bank of India (RBI) is anticipated to implement a second 25-basis-point interest rate cut in April, with further rate reductions likely in the coming months. Lower interest rates typically boost borrowing and investment, further supporting economic expansion and corporate profitability. These factors combined have created an environment conducive to market growth, reinforcing optimism among investors and market participants.

India’s corporate earnings outlook appears to be showing signs of improvement, with market participants closely watching the upcoming Q4FY24 results, set to be released in April. These earnings reports will be a key factor in determining the sustainability of the ongoing market rally. In Q3FY24, corporate earnings growth fell short of expectations, coming in 10% below the long-term historical average of 15%. However, analysts anticipate a stronger performance in Q4, supported by a significant increase in government spending, which has bolstered economic activity and corporate revenues across various sectors.

Despite the expected improvement, there is a limiting factor to consider—the earnings base for Q4FY24 is already relatively high. This could temper the upside potential, as year-over-year growth may not appear as strong when compared to the elevated base from the previous year. Nonetheless, looking beyond the immediate quarter, market expectations for FY26 remain optimistic, with projections indicating robust earnings growth. If corporate earnings align with the long-term average of 15%, it could provide further momentum for the ongoing stock market rally.

In the near term, some volatility may emerge due to trade-related developments. On April 2, India is expected to implement a reciprocal tariff, which could temporarily impact market sentiment. However, discussions are underway to mitigate the potential disruptions, as a bilateral trade agreement is reportedly in the final stages of negotiation. If successfully implemented, such an agreement could ease concerns and provide clarity on trade relations, reducing uncertainty for businesses and investors.

Overall, while short-term fluctuations may arise due to trade policy adjustments, the broader trajectory of corporate earnings and economic fundamentals will likely play a more decisive role in shaping market trends in the coming months. Investors will be closely monitoring Q4FY24 results and fiscal policy developments to gauge the sustainability of the current market rally.