Midcaps, smallcaps crumble as tariff shock, US recession fears rattle investors

Barclays projected a potential downside risk of 30 basis points to India’s GDP growth for FY26

Broader markets took a severe hit on April 7, as investor sentiment soured sharply following China's decision to impose retaliatory tariffs of 34 percent on the US. The move reignited fears of a global trade war and sent shockwaves across the Indian equity space. The Nifty Midcap 100 and Nifty Smallcap 100 indices bore the brunt of the selloff, plunging as much as 6 percent and significantly underperforming the benchmark indices, which themselves saw steep declines of around 3 percent.

Every single stock within the Nifty Midcap 100 and Nifty Smallcap 100 universes was trading in negative territory, reflecting the intensity of the selloff. Among midcaps, shares of Mazagon Dock, Bharat Forge, and NALCO witnessed the steepest corrections, each tumbling by 10 percent. In the smallcap segment, Tejas Networks, Newgen Software, and Garden Reach Shipbuilders were among the hardest hit, with each stock declining by 11 percent.

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The sharp downturn in equities was further amplified by growing concerns over a potential recession in the US. Historically, recessionary fears in the US tend to trigger global risk aversion, leading to a pullback in foreign investment and denting investor confidence in emerging markets like India.

According to online prediction platform Polymarket, there is now a 64 percent probability of a US recession in 2025—a sharp rise from the 38 percent likelihood recorded just a week ago.

Investor confidence has deteriorated swiftly in the wake of these developments, with analysts noting that China’s retaliatory action has raised the risk of an escalating trade war.

Kotak Institutional Equities stated that the higher-than-anticipated tariffs, coupled with a murky global macroeconomic backdrop, should lead to a more cautious investment environment.

Adding to the cautious outlook, Barclays has projected a potential downside risk of 30 basis points to India’s GDP growth for FY26 due to the fallout from global trade tensions. Meanwhile, Goldman Sachs anticipates a 2 to 3 percent impact on corporate earnings growth over the next couple of years as a direct consequence of the new tariff measures.

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