Dear Reader,
It’s results season once again, for the September 2025 quarter. This time, though, there’s something rather weird about them -- they may not matter much. That’s because both the full impact of Trump’s punishing tariffs on India as well as the GST cuts will be felt in the December quarter. In fact, the impact of these factors is likely to be distorted in Q2, simply because on the one hand exporters tried to beat the US tariff deadline, seen in the 27.9 percent rise in merchandise exports to the US in July while on the other hand consumers postponed their purchases in anticipation of lower prices after the GST rate cuts took effect on September 22. As a Motilal Oswal report put it, the July-September period is best described as “a quarter of bottoming earnings growth and a moderation in the trajectory of earnings cuts”. Our story on the outlook for lenders said, “More than Q2, the second half of FY26 holds key, so investors would focus on commentary than numbers this earnings season.”
We wrote about the earnings cuts that were a prelude to the Q2 earnings season, but there was a silver lining, as the pace of downward earnings revision slackened. Analysts at JM Financial pointed out, “The number of Nifty companies that saw an EPS cut decreased from 60 percent in August to 36 percent in September 2025.”
If that looks like clutching at straws, there are other reasons to be less pessimistic. For instance, there’s a favourable base effect. Nominal GDP growth in Q2 FY25 slipped to 8.3 percent from 9.7 percent in Q1 FY25. In tandem, year-on-year profits after tax of non-financial listed companies, net of exceptional items, fell from -5.4 percent in Q1 FY25 to -8.9 percent in Q2, according to the CMIE database. The financial sector too saw a deceleration in year-on-year profits growth in Q2 last year. That should impart at least a statistical boost to earnings growth.
The MPC forecasts real GDP growth of 7 percent for the September 2025 quarter and a 1.8 percent y-o-y rise in retail inflation. That implies a nominal growth of 8.8 percent—average earnings growth should at least be around that. The Motilal Oswal report estimates “MOFSL Universe/Nifty-50 earnings to grow 9%/6% YoY in 2QFY26”. Ex-Financials, it expects earnings to increase 16%/10% YoY for the MOFSL universe/Nifty 50.
But Q2 is largely yesterday’s story. Almost every brokerage house has postponed the optimism to the second half of the fiscal year. Indeed, a Jefferies research report has the headline, ‘Sep25 earnings preview - Recovery postponed’.
There are strong reasons for expecting a better second half, and it’s not just festive sales. Lower inflation, the effect of the tax cuts — both income tax and GST, but especially the latter -- a decent monsoon, improving liquidity, the full transmission of the interest rate cuts, the easing of credit restrictions, should all boost growth and find a reflection in corporate earnings from Q3 onwards. Commodity prices should remain low, given tepid global growth. The icing on this cake could be a likely RBI rate cut this quarter. As my colleague Madhuchanda Dey wrote, “Q2 could mark the near-term end to challenging corporate earnings and provide vital cues for probable earnings revival beyond FY26. We do not rule out sporadic euphoria riding on the positive commentary”. We also wrote about the earnings outlook in Q2 and beyond for FMCG firms, cement companies and value fashion retailers. And with the GST reforms and rate cuts to spur a consumer demand revival, no wonder this consumer company is in a sweet spot.
Will the pent-up demand be sustained? A Kotak Bank report warns, “Looking ahead, Q3FY26 is expected to benefit from a further uplift in consumer spending and front-loaded government expenditure. The corporate earnings data in this quarter should witness a reasonable upgrade after a muted 1HFY26. However, we remain cautious about the sustainability of these trends beyond Q3FY26. Persistent uncertainties around tariffs continue to cloud the outlook for export-oriented sectors, raising concerns about potential implications for employment.”
Simply put, the worm in the recovery bud is the Trump tariff increase, exacerbated by the restrictions on US visas. The Motilal Oswal report says, “Growth can be affected if the tariff stalemate extends into 2HFY26, especially if the US issues further trade-related announcements targeting other sectors or aspects of its trade with India.” Morgan Stanley, in an otherwise bullish report on India, says, “The only key risk is US tariffs and the associated potential to slow both US and India export growth.” A victim of slower US growth is TCS, and we analysed its Q2 results and discussed what its pivot to AI means for investors.
Any signs of a potential easing of tariff tensions with the US will therefore boost sentiment dramatically. And as if on cue, a DBS note on October 10 said, “There is speculation that the India-US trade deal is near the finish line and might be announced by mid-November.” Our columnist pointed out that “the full impact of GST 2.0 on domestic demand, the consequent potential recovery in private capex, the bottoming out of banking sector stress, and a hopeful resolution of India’s tariff-situation with the US are all expected by Q3 FY26”. The market will be supported on that hope, as it will be by the lower interest rates, which should prop up valuations.
As for the downside, the MSCI India equity index, as on October 9, is down 7.6 percent from a year ago in dollar terms, compared to a rise of 19.8 percent for the Emerging Market index and 15.5 percent rise for the EM (ex-China) index. We wrote here how India has missed out on the emerging markets party. How much worse can it get?
This week also saw the election of Sanae Takaichi as head of the LDP, Japan’s ruling party, which could make her Japan’s first female prime minister — we wrote about the geopolitical implications here. We forgot to mention, however, that Takaichi was also a biker in her youth and a heavy metal drummer. Here’s an old video of the future Japanese PM singing ‘Rusty Nail’ a song by heavy metal band XJapan. The song is in Japanese, but here’s a verse translated into English:
‘Forgetting the weekend’s scars that ended in the prologue,
even if I embrace the flowing times, it pierces my heart.
Oh, rusty nail’.
The song might prove prophetic, because, at the time of writing, Japan’s ruling coalition has split, throwing into doubt Takaichi’s bid for premiership. That rusty nail may still pierce her heart.
The song may also prove prophetic for India's economic story—where the nail of Trump's tariffs threatens to pierce through any H2 recovery unless a trade deal materialises soon.
Cheers,
Manas Chakravarty
In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:
Stocks
Canara Robeco AMC IPO, Canara HSBC Life Insurance IPO, ZF Commercial Vehicle Control Systems India, Aditya Birla Lifestyle Brands, LG Electronics IPO, Titan Company, NMDC, Shringar House of Mangalsutra, Tata Capital IPO, Banking stocks
Markets
Silver ETF mania: Premiums soar as investors chase the shine, Kotak raises red flags,
Nifty IT index sinks 27% from highs, is time to re-enter or wait for further correction?
The difficult art of successful trading in the new F&O regime
Gold hits $4,000: Ray Dalio, Jeffrey Gundlach push for 15-25% portfolio allocation
Will focus on active, retail equity assets; cost-to-income headroom available: Canara Robeco CEO Rajnish Narula
Financial Times
Gold bubble should prompt central banks to sell the metal
Brace for a market melt-up
America is now one big bet on AI
OpenAI’s computing deals top $1tn
Gold miners outstrip AI, bitcoin to put ‘unloved’ industry in spotlight
Japan has an ‘enshortification’ problem
Impact of Trump tariffs is beginning to show in US consumer prices
Companies & sectors
Should dip in FMCG sales due to GST cuts be a concern for investors?
Why are stock prices lagging performance in listed realty firms?
We are committed to improving free cash flows, return ratios: Neeraj Kanwar, MD, Apollo Tyres
EU’s steel duties a new threat for Indian producers
The regulatory deficit that turns India's pharmaceutical strength into fatal weakness
Securitisation growth slows for a second year as banks retreat
Economy & Policy
For ethanol blending to become popular among consumers, it needs to reflect in lower pump prices
China’s solar policy shift can raise costs, but will benefit India in the long run
M&A funding: Why banks must lend with their eyes open
IMF warnings on forex market that policymakers must heed
From Surge to Stall — Why India’s RE bidding has hit a speed bump
Where do households see inflation ahead?
Geopolitics & Geoeconomics
World Bank wants South Asia to cut tariffs despite global protectionist wave
Before the ASEAN Summit: India's rush to fix a broken trade agreement and $45 billion deficit
Trump's pharma tariffs are a steep tax on innovation
A durable peace in the Middle East remains a mirage
Tech & Startups
AI poses growth challenges for IT services sector
The muddled quest for Digital Swaraj
Zoho to introduce end-to-end encryption for text chats on Arattai, says CEO Mani Vembu
MC Interview: Graphcore’s new Bengaluru unit will lead its own AI compute engineering project for the globe, says CEO Nigel Toon
Others
Bihar Elections 2025: 5 key X factors that could decide the outcome
Personal Finance | What not to expect while resetting portfolios during uncertainties
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