Daily Voice: Hope for earnings upgrades may delay further especially after higher than anticipated US tariffs, says DSP MF's Jay Kothari

Jay Kothari is the Senior Vice President, Global Head International Business and Lead Investment Strategist at DSP Mutual Fund

There was initially hope for earnings upgrades, but the recent announcements may delay this unless there are positive developments post-negotiations with respect tariffs, said Jay Kothari, Senior Vice President, Global Head International Business and Lead Investment Strategist at DSP Mutual Fund in an interview to Moneycontrol.

According to him, the situation remains dynamic, and investors should be cautious about expecting immediate upgrades.

He said the report suggests the risk of recession in the global economy this year has increased to 60%, up from 40% earlier, with the US being one of the drivers for this trend.

A significant concern is that sustained restrictive trade policies and reduced immigration flows may impose lasting supply costs that will lower US growth over the long run, he added.

Do you believe Donald Trump will be able to reshape the US economy through the use of tariffs?

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Jay Kothari

Senior Vice President, Global Head International Business and Lead Investment Strategist|DSP Mutual Fund

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While the intention behind using tariffs is certainly to strengthen the US economy, these announcements may put the US economy, consumption, and household wallets at risk. This could lead to higher inflation due to increased costs of imported goods and lower growth as it affects consumer purchasing power. Therefore, we would not react hastily and instead allow the situation to stabilize before analysing it further. The situation may change rapidly as negotiations progress.

Do you see major signs of a slowdown in the US economy? What is the possibility of a recession in the world's largest economy?

According to some global views, the risk of recession in the global economy this year has increased to 60%, up from 40% earlier, with the US being one of the drivers for this trend. A significant concern is that sustained restrictive trade policies and reduced immigration flows may impose lasting supply costs that will lower US growth over the long run. Rough estimates suggest that the impact on US inflation could be an increase of 150 basis points, and the impact on real GDP could be a decrease of 50-100 basis points.

Do you think India will gain more than lose from the discounted reciprocal tariffs? Do you foresee any changes in these tariff rates in the coming weeks?

Ideally, India should capitalize on the tariff differentials, particularly in sectors where it has a competitive advantage, and try to further boost initiatives like "China + 1." This could be a long-term positive if executed effectively. Additionally, there is a possibility of changes in tariff rates over time, although this might be more of a hopeful expectation than a certainty.

Do you think the market will now shift its focus from US tariffs to earnings and economic growth?

While we do believe that the market's focus will now shift towards earnings and economic growth, it's important to recognize that the impact of tariffs will not be negligible. Tariffs and growth/earnings are not mutually exclusive; rather, they are interconnected. The effects of tariffs will be dynamic, with possible tweaks over the coming weeks or months. The downward pressure on global GDP growth will certainly have some impact on India, potentially leading to a growth slowdown. This could, in turn, affect revenue growth for corporates, which would then impact earnings.

Do you see the Nifty going above 27,000 in FY26?

Market returns are generally correlated with nominal GDP growth, which is expected to be around 11%. Given this context, expecting a 16% return for the current year might be a stretch, especially considering the potential for further earnings downgrades due to recent developments. However, as always, we would advise investors to focus on long-term investments, which typically help smooth out near-term pressures such as tariffs, COVID, and geopolitical issues. We remain constructive from a beyond-three-year investment perspective.

Do you see the rally continuing in the banking sector in FY26?

With further relaxations from the RBI on various aspects, banks can now focus on growth, which was previously the biggest risk for the sector. We need to see loan growth recovering from 11% to 13-14% next year. This recovery is crucial for sustaining the rally in the banking sector.

Which sectors do you think will be the star performers in FY26?

Domestic or inward-looking sectors will be less risky and, hence, more attractive. Sectors such as consumption, domestic pharma, hospitals, and discretionary spending are likely to perform well. However, the key to success will be bottom-up stock selection, as not all companies within these sectors will benefit equally.

Do you see a high possibility of earnings upgrades starting from Q1FY26?

While there was initially hope for earnings upgrades, the recent announcements may delay this unless positive developments post-negotiations occur. The situation remains dynamic, and investors should be cautious about expecting immediate upgrades.

Are you particularly bullish on gold for FY26?

Gold tends to perform well during higher inflation, lower real GDP growth, geopolitical tensions, and uncertainty, which aligns with the current economic scenario. Therefore, gold is likely to continue performing well in FY26.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.