US-India trade deal: Indian stock market euphoria fizzles! Why are gains likely to be capped? Explained

A day after clocking stellar gains of 2.5% each, the Sensex and the Nifty 50 traded rangebound on Wednesday, February 4, swinging between gains and losses. The Sensex dropped over 600 points to an intraday low of 83,120, while the Nifty 50 dropped 25,570 during Wednesday’s session. The mid and small-cap segments also witnessed selling pressure.

Why is the Indian stock market not able to sustain gains?

The domestic market saw a sharp rally on Tuesday after an India-US trade deal was announced. The deal, which reduced US tariffs on Indian goods from 50% to 18% is a significant positive for the Indian economy, especially for sectors like textiles, seafood, chemicals, auto ancillaries, and new energy businesses like solar.

The domestic market cheered the deal. But soon, the optimism fizzled out. A key factor behind that is that the market seeks more clarity on the details of the deal.

Moreover, US President Donald Trump’s unpredictability remains a key concern for markets. Tariffs remain a key strategy of the Trump administration, and there is no guarantee about his stance on tariffs on India. For example, his recent stance on South Korea and Europe has exhibited his unpredictability over tariffs.

Another factor is the growth-valuation mismatch of Indian equities because of weak earnings. While large-caps are near their historical average, mid and small-cap segments are still at stretched valuations. This is likely to keep a rally short-lived.

The market’s focus has shifted back to fundamentals. While there are positive triggers such as trade deal optimism, Budget expectations, and policy announcements, the sustainability of any rally ultimately depends on earnings growth.

“The rally fuelled by the US-India trade deal will face hurdles to sustain. Since valuations continue to be high, there is no fundamental support for a sustained rally,” VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, noted.

Liquidity could be one factor, especially in mid- and small-caps, where retail participation is high. Some investors may be locking in gains or staying cautious due to volatility.

However, unimpressive earnings appear to be the bigger issue.

“Over the long term, earnings dictate market direction. Events like the Budget, trade deals, or industry-level announcements can influence sentiment in the short run, leading to sharp reactions. But for the market to sustain gains, earnings backing is essential,” said Ajit Mishra, SVP of Research at Religare Broking.

Mishra underscored that markets operate on a discounting mechanism. Even if the news flow is positive, the market may not be confident about the earnings outlook for the coming quarters.

“Investors want to see whether policy announcements translate into actual earnings improvement. It may take time for policy decisions to show real impact on corporate earnings. Until then, the market is likely to remain range-bound,” said Mishra.

The headline indices are near their record highs. The real pressure is in mid-cap and small-cap portfolios.

“Large caps have held up better, keeping the benchmark indices resilient. But the broader market is still struggling due to a lack of earnings stability. Unimpressive earnings, combined with elevated valuations in certain segments, have created a valuation-growth mismatch. This is keeping investors cautious,” said Mishra.

Geopolitical risks also remain a key overhang. For example, any escalation involving Iran could push crude oil prices sharply higher. Since India is a major oil importer, a spike in crude could hurt the economy and market sentiment.

Short-term market reactions will continue to be driven by sentiment around events such as trade developments and policy announcements.

However, as Mishra puts it, for a meaningful and sustained recovery, earnings growth and stability are necessary — especially for mid- and small-cap stocks.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.