Aug 12, 2025
• U.S. strikes trade deals with some partners but escalates tariff pressure on others.
• Weak jobs data signals a slowdown in U.S. private-sector economic activity.
• Recent escalation of tariffs tensions with US may keep Indian markets volatile, base case for a negotiation to be reached
• India Inc. earnings broadly in line, but downgrades continue.
• Deep Dive – Retail investor participation in India is rising and may be structural, but its resilience in downturns remains untested.
Here We Go Again
U.S. tariff policy remains a key focus for markets as recent trade negotiations yielded mixed results. While the U.S. finalized trade agreements with the EU and Japan, President Trump announced higher tariffs on 70 countries that did not reach agreements. He further signalled likely sectoral tariffs on Pharma and semiconductors. Early economic data indicates that these tariffs are contributing to rising inflation and slowing labour market.
Trade tensions between the U.S. and India have escalated due to U.S. concerns over India’s continued imports of Russian crude oil. President Trump raised tariffs on Indian goods to 50%, likely as a strategic move to pressure both India and Russia. We view this as a temporary development and expect India to negotiate a fair-trade agreement. In the meantime, market volatility may continue.
Global Macro Update
The U.S. trade deals with the EU and Japan, which include a 15% tariff and reciprocal commitments, are expected to be a template for future U.S. trade deals. While these agreements have eased some uncertainty, the U.S. announced higher tariffs on India, Canada, Brazil, Switzerland, and Taiwan following unsuccessful negotiations. These tariffs are widely viewed as negotiation tactics, with the possibility that President Trump may reverse them, as seen in previous instances. Meanwhile, tariff-related uncertainty is likely to persist.
Interestingly, tariffs on steel, aluminium, and auto parts have raised U.S. car manufacturing costs more than the tariffs on imported vehicles. Hence, these policies are penalizing domestic manufacturing, contrary to its intended goal. These distortions are becoming increasingly evident in slower growth, weaker job markets, and rising inflation.
The U.S. economy grew 3.0% annualized in Q2 2025, surpassing the 2.4% forecast and rebounding from a 0.5% contraction in Q1. The growth was driven mainly by a 30.3% drop in imports. Normalizing for trade volatility, the U.S. GDP rose 1.2% in the first half of the year, much below historical trends, reflecting softer demand amid tariff uncertainty and slowing private-sector activity.
The July 2025 jobs report showed a clear slowdown in hiring. So much so that President Trump ended up firing Chief of the Bureau of Labor Statistics over allegations of data manipulation. Nonfarm payrolls increased by just 73,000 in July, the weakest gain in over two years, while unemployment rose to 4.2% from 4.1%. The unemployment rate would have likely been higher without record deportation under the new administration. Additionally, job gains for the previous two months were revised down by a total of 258,000, bringing the three-month average to just 35,000. Private sector hiring saw a significant deceleration, although government employment remained steady.
US Job market has weakened significantly
Source: Bloomberg, Sanctum Wealth
Adding to concerns, inflation accelerated in June 2025, with headline PCE rising 2.6% year-on-year and core PCE remaining sticky at 2.8%, both above the Fed’s 2% target. Monthly inflation gains pointed to tariff-induced goods inflation, with notable increases in household furnishings and recreational goods.
US PCE inflation sticky
Source: Bloomberg, Sanctum Wealth
Fed Chair Powell acknowledged that tariffs are raising goods prices and increasing inflation risks. The FOMC kept interest rates unchanged, with two governors dissenting, the first instance since 1993. The Fed warned that tariffs could slow growth and raise unemployment. Chair Powell said the committee will wait for more data before deciding in September. While sticky inflation is a concern, we believe the Fed risks falling behind as the economic effects of tariffs become more evident.
Europe’s economic outlook looks more cautiously optimistic as trade uncertainty eased after the recent deal. While growth so far has been muted, manufacturing PMI rose to 49.8 in July, the highest since July 2022, and the services PMI reached a six-month high of 51.2. Inflation remained at the ECB’s 2.0% target in June, while core inflation inched up to 2.3%. The ECB kept interest rates unchanged after cutting them eight times earlier. With tariffs reduced to 15% from the earlier 30% threat, easing uncertainty and increased fiscal support for defence, Europe may begin to recover gradually.
China’s economy grew 5.2% YoY in Q2 2025, slightly above expectations, keeping it on track to meet its 5% annual target despite U.S. tariff pressure. Growth in the first half averaged 5.3%, driven by industrial output and export front-loading. However, underlying weaknesses remain, with July’s manufacturing PMI at 49.3, slowing retail sales, weak investment, and continued deflation. With the U.S.-China trade deadline approaching and limited stimulus, growth is expected to decelerate in the second half unless new support measures or a trade breakthrough emerge.
Global Market Outlook
Global markets have risen nearly 20% since April lows, hitting new highs in July. The S&P 500 is up about 25%. U.S. policy uncertainty eased through July with new trade deals, though recent tariff hikes on some countries have added volatility. Still, markets expect President Trump to reverse course. Global equities have remained resilient so far; however, with economic data weakening, there are currently no clear catalysts to support the continuation of the rally.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in USD terms
U.S. companies so far have reported better earnings in Q2 2025 than expected, with EPS growing at 11.8% YoY. While costs have escalated, margins are holding up, and top-line growth remains positive in sectors like industrials, consumer tech, and even financials. However, earnings growth in recent years has relied more on margin expansion than on sales growth. Analysts expect earnings to grow at around 10% annually from 2025 to 2027. These seem ambitious targets especially if tariffs put pressure on margins. Further U.S. equities remain expensive, trading at a forward P/E of 22.1, over two standard deviations above its historical average and above the 10-year average of 18.7.
Ambitious targets for S&P earnings growth
Source: Bloomberg, Sanctum Wealth
Japanese equities have climbed 12% since mid-June, approaching their highest levels since the early 1990s. Foreign investor inflows have risen amid a weak yen, improved corporate governance, and strong Q2 earnings in autos and semiconductors. Following the ruling party’s loss of its majority in the Upper House in July and the Lower House last October, fiscal policy risks have increased. Nonetheless, Japan’s steady growth, ongoing reforms, new trade deal with the U.S., and attractive valuations continue to support the market.
India Macro Update
President Trump announced a 25% tariff on Indian goods and an additional 25% tariff due to India’s import of Russian crude oil. India’s key exports to the U.S. include textiles, electronics, pharmaceuticals, and gems and jewellery. iPhones and pharmaceuticals remain exempt. Hence, the tariffs mainly impact textiles and jewellery, which contribute only modestly to India’s economy. However, prolonged tariffs could undermine India’s competitiveness in the global shift away from China. President Trump appears to be using these measures to pressure India into a trade agreement and to influence Russia by targeting its trade partners. While India has not budged, both sides may still reach a fair-trade deal through continued negotiations.
India’s macro indicators remain mixed. Industrial production (IIP) remained subdued at 1.5% in June 2025 (vs 1.2% in May), but July’s manufacturing and services PMIs were strong at 59.1 and 59.4, respectively. We expect economic data to improve going forward. Rural wage growth, both agriculture and non-agriculture, has picked in recent months. The impact of recent personal income tax cuts should begin to show in upcoming data. Additionally, the 8th Pay Commission, expected from January 2026, could provide a boost to discretionary consumption, as seen with previous pay-commission awards.
Rural real wage growth picking up
Source: Mirae AMC
Meanwhile, India’s CPI inflation dropped to a 77-month low of 2.1% in June 2025, down from 2.8% in May. Food inflation turned negative at -1.1%, driven by a favourable-base effect and falling prices in vegetables, pulses, cereals, and dairy products. Inflationary pressures in India are likely to be muted, notwithstanding the recent concerns about Russian crude oil imports.
As expected, the RBI kept the policy rate unchanged at 5.5% and maintained its neutral stance. It lowered its inflation forecast for FY26 to 3.1% from 3.7% but projects a rise to 4.4% in Q4FY26 and 4.9% in Q1FY27. The RBI also retained its FY26 GDP growth forecast at 6.5%. Given the benign inflation outlook, analysts expect a 25bps rate cut in the October policy meeting. We believe the RBI is waiting to assess the effects of front-loaded rate cuts, the personal income tax cut, and U.S. tariffs on the global economy before considering further easing. As the RBI has already front-loaded cuts, we do not expect significant additional reductions from current levels, unless India’s growth surprises on the downside.
India Equity Outlook
Indian equities declined about 3% in July 2025, driven by FPI outflows amid stretched valuation and mixed earnings. Mid- and small-caps declined 3.8% and 5.7% respectively. Pharma sector outperformed while IT witnessed heavy selling.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
India Inc.’s Q1 FY26 earnings have largely aligned with expectations. Nifty companies that have reported so far posted 7.5% YoY EPS growth, ahead of the estimated 5.7%, with more beats than misses. Despite this, FY26 EPS estimates were trimmed by 1.1%, and FY27 by 0.8%. Broader market earnings were also in line, but downgrades continued to outpace upgrades, leading to further EPS cuts. Midcaps so far have delivered double-digit EPS growth as expected, while small caps have reported negative growth and missed estimates.
Banks delivered mixed performance amid visible margin pressures. NBFCs posted muted results, with weak asset quality and loan growth. IT companies faced another challenging quarter as revenue growth remained soft. Consumer companies saw an improvement in volumes, supported by a steady rural recovery and a gradual pickup in urban demand.
Overall, Q1 FY26 earnings have been largely stable, and the pace of earnings downgrades has reduced. We expect earnings growth to improve in the second half of FY26, driven by a revival in both urban and rural demand, supported by fiscal and monetary measures.
Foreign Portfolio Investors (FPIs) turned net sellers in July, withdrawing around INR 5,500 crore amid valuation concerns. Despite being net buyers from March to June, FPIs have sold nearly INR 83,000 crore year-to-date. In contrast, Domestic Institutional Investors (DIIs) have provided steady support, consistently absorbing FPI outflows. Notably, SIP inflows crossed INR 27,000 crore for the first time in June 2025.
SIP flows touched new all time high in June 2025
Source: AMFI, Sanctum Wealth
Strong domestic inflows have sustained elevated Indian equity valuations despite volatile FPI activity. These flows may continue to support the market in the near term, but their structural strength will be tested if the market enters a phase of prolonged muted returns. More on this later
We believe the market currently lacks clear direction, with stock-specific movements driven by individual earnings results. As noted earlier, this environment may favour active managers, given the potential for muted overall returns amid elevated valuations. Market momentum could improve in the second half as earnings growth accelerates. Accordingly, we are maintaining a near-neutral weight on equities at present.
Fixed Income Outlook
The RBI policy and the cut in inflation forecasts were in line with expectations. As a result, our view on fixed income remains unchanged. We believe most of the gains from duration are behind us and continue to prefer corporate bond funds for debt allocation. Investors seeking tax-efficient fixed income options with a time horizon of over two years may consider income-plus-arbitrage funds.
Gold and Silver Outlook
Gold prices have traded in a range since hitting new highs in April 2025. Most major financial institutions expect gold to remain strong through 2025–2026, with price targets between $3,700 and $4,000 per ounce. Central bank buying, gold’s role as a safe haven, and expectations of Fed rate cuts continue to support prices. Rising geopolitical risks and trade tensions, like those triggered by President Trump’s recent tariff announcement, could push prices higher in the near term. However, stronger-than-expected U.S. growth, a hawkish Fed, or a slowdown in central bank demand could limit further upside.
Analysts remain positive on silver, not just as a catch-up trade to gold but also due to improving fundamentals. Supply has been in deficit since 2021, industrial demand is rising, ETF inflows have strengthened, and a weaker U.S. dollar adds support. The gold-to-silver ratio stands at 90x, well above the long-term average of 70x, indicating potential for silver to rally. However, we view gold’s rally as more structural, and given silver’s higher volatility, we’ve limited its allocation to 3% even in our most aggressive model portfolios.
Deep Dive- Rise of retail investments in India
The Indian equity market is changing rapidly as DIIs and retail investors using systematic investment plans (SIPs) play a bigger role. Domestic mutual funds now hold a record 10.4% of all Indian equities, and SIP inflows hit an all-time high of ₹27,269 crore in June 2025, marking the first month above INR 27,000 crore. For the first time in decades, domestic DIIs have FPIs in market share, underscoring retail India’s growing influence.
DIIs market share is now higher than FPIs
Source: Motilal Oswal Financial Services, Sanctum Wealth
This makes it a good time to think about how rising retail participation affects equity markets and what we can learn from other countries’ experiences.
In the U.S., household stock ownership increased from 20% in the 1980s to over 50% by the 2000s, driven by 401(k) plans, lower fund fees, and commission-free trading. Despite major downturns (1987, 2000–01, 2008, 2020), retail ownership stayed above 50%. This shift raised structural valuations—S&P Composite’s average CAPE ratio moved from 14.4x (1900–1980) to 23.5x (post-1980) and hasn’t dipped below double digits since 1985.
US household ownership of equities
Source: Federal Reserve Survey of Consumer Finance Includes both direct and indirect equity holdings
Includes both direct and indirect equity holdings
Retail participation has likely raised the valuation baseline
Source: Bloomberg, Sanctum Wealth
In Europe while retail participation is lower at around 20% and has only increased gradually, P/E ranges have moved from 10-15x in the 2000s to 13-20x over the last 5 years.
In contrast, South Korea retail ownership grew from 15% in 1990 to 25% in 2019, then accelerated post-Covid to account for 64% of trading volume, highest in the world currently. Still, this participation didn’t boost P/E ratios as the Korean market continues to trade at a persistent discount to peers amid concerns about corporate governance. Additionally, Korean investors show high level of derivative activity.
Japan’s 1980s retail surge drove household stock ownership to 65% and P/Es to 80x, briefly making up 45% of world market cap. After the subsequent crash, retail ownership fell to about 12% today. New policies like NISA and governance reforms are now gradually re-engaging Japanese households.
India’s context is distinctive. SIPs promote disciplined, regular investing, helping investors avoid timing pitfalls and supplying fund managers with steady liquidity, potentially reducing volatility. Low minimums have broadened access with 54% of SIPs now come from B-30 cities. A younger population also lends longer investment horizons and more risk appetite. During recent FPI outflows and the January–February 2025 correction, retail flows absorbed selling pressure and helped stabilize prices.
Today, retail investors directly and via mutual funds are a key force driving liquidity, price discovery, and resilience in the markets. Their steady SIP inflows and direct stock purchases have helped the market absorb large FPI outflows with limited volatility. The recent correction in January and February was also quickly bought into by these investors.
However, risks remain. A large share of SIP investors have only experienced bull markets, and it remains to be seen how they will behave in a prolonged downturn. Rising SIP‐stoppage ratios point to impatience and portfolio churn, while concentrated flows into mid-cap, small-cap, and thematic funds create pockets of potential overvaluation. Moreover, India’s robust derivatives market, where roughly 90% of retail participants lose money, echoes South Korea’s speculative excesses. Without stronger financial education and controls on speculative trading, these factors could undermine the benefits of rising retail participation.
In summary, while SIPs and retail participation are likely structural trends and may sustain higher market valuation baselines, it’s too early to conclude they have fundamentally improved market stability. Persistently high SIP cancellations, thematic fund flow concentration, and speculative activity warrant caution. So far, the trend’s impact has been positive, but the resilience of these new investors remains untested in a sustained downturn.
