“We see further downside for Indian equities in Q1FY26, notwithstanding the complacent response to the reciprocal tariffs by the U.S. The direct impact on India may be muted, but the resulting U.S. recession poses a ~3% risk to FY26 Nifty EPS, and the consequent derating could push the Nifty down to 21,500,” said Seshadri Sen, Head of Research at Emkay Global.
Tracking global cues, the Nifty fell around 1% intraday to slip below the 23,000 mark. Indian markets, however, remain relatively resilient, with the decline less severe than in global peers. The Nasdaq ended the overnight session 6% lower, Japan’s Nikkei was down over 3%, and Australia’s ASX 200 dropped 2.5%.
Markets in China, Taiwan, and Indonesia were closed for a holiday.
US Tariffs and Second-Order Risks
The 26% U.S. reciprocal tariff is a negative for India, though the country is relatively less impacted than other Asian nations—a thin silver lining in a dark cloud. However, the absolute loss in exports to the U.S. is still a setback.
“The second-order effect will hurt India more. We are now assuming a severe U.S. recession and a significant short-term correction in global commodities. Metals will be hit the most, followed by technology, whose higher index weight has a larger market impact. Autos and chemicals are also at risk,” Emkay noted.
Earnings Risk and Nifty Valuations
Emkay sees a 3% proforma risk to its FY26 Nifty EPS estimate of Rs 1,160, primarily from potential tech earnings downgrades, given that consensus had been building in a recovery. Metals—a significant contributor to FY26 Nifty EPS—are now seen as vulnerable due to new capacity additions and falling prices.“In the short term (Q1FY26), we see the risk of the Nifty correcting to 21,500 as valuations could fall to -1 standard deviation levels of 18.3x on lower earnings. Long-term projections are uncertain, given the lack of visibility on both policy actions and their broader implications. Nevertheless, we are rolling forward our long-term Nifty target to March 2026 (from December 2025) to 26,000, based on the revised FY27 Nifty EPS estimate of Rs 1,320 and a target valuation of 20x, in line with the long-term average,” the brokerage added.
For now, investors should brace for heightened volatility as the Nifty stares at a potential correction to 21,500 in the coming months.
