Stock market correction may intensify in next 3 months; watch out for 2nd order tariff risks

Nifty is all likely to test 21,500 in the April-June period as the second-order effect of Trump tariffs hurt India more, Emkay Global said in a strategy note. The brokerage sees a 3 per cent proforma risk to its Nifty FY26 EPS estimate of Rs 1,160, mainly from technology earnings cuts, given that the consensus was building on for a recovery. Metals, a large contributor to the FY26 Nifty EPS, is also now vulnerable as new capacity comes on stream and lower prices could hurt, Emkay Global warned. 

"The direct impact on India may be muted, but the resulting US recession poses a 3 per cent risk to FY26 Nifty EPS and the consequent derating could push the Nifty down to 21,500. Longer term, rate cuts and commodity price corrections would counterbalance this, and we remain positive on domestic-facing sectors like discretionary consumption," the domestic brokerage said.

Emkay sees a near-zero probability of India imposing retaliatory tariffs on the US. There is a likelihood of some negotiations and India lowering import duties, it said.

"In general, we do not see any obvious areas where these cuts pose a significant earnings risk to domestic companies. Domestically, we see the likelihood of India intensifying pro-cyclical policies to combat the contractionary impulses of slowing global trade. The RBI is already easing up on multiple fronts, and that process may intensify," Emkay said.

This brokerage sees little chance of a change in fiscal policy, as the government would not risk macro-financial stability by easing both, monetary and fiscal policy simultaneously, in a period of such intense global uncertainty.

"We are dealing with extreme uncertainty and there are potential developments that could move the economy, earnings, and markets either way. The big positive would be a rollback of these tariffs, especially if the resultant US recession is more severe than anticipated. The global coordinated monetary easing is the other upside, and India would be well positioned to attract the resultant global flows into risky assets and equities," Emkay Global said. 

On the downside, it said an intensification of these tariffs would pose further earnings risks which would be compounded by additional PE derating. Overall, metals will be hit the most, followed by technology whose higher weight has a bigger market impact. Auto and chemical stocks are also at risk.  

"Financials are a strong short-term trade as it benefits from both, being immune to global turmoil and benefiting from the RBI’s aggressive moves that have turned system liquidity positive. We prefer playing this through NBFCs over banks, as they benefit more in the short term. We remain neutral on IT – while earnings are at risk, valuations are 10 a per cent way from -1sd levels when the sector typically starts turning around," Emkay Global.

Its preferred sector though remains consumer discretionary (including auto), especially now that the RBI is creating conditions for a recovery in consumer lending.