Dear Associate,
As we move through August 2025, the equity market narrative continues to be shaped by a complex interplay of global trade disruptions, domestic earnings dynamics, and evolving investor flows. The month has brought renewed focus on valuation discipline, earnings visibility, and the importance of resilient asset allocation strategies. Let’s unpack the key developments and their implications.

Global Equity Landscape: Navigating Tariff Turbulence and Inflation Uncertainty
The global equity markets presented a mixed picture in July. While select Asian markets such as Taiwan, China, and South Korea posted gains, major Western and emerging markets, including India, faced headwinds. The divergence was largely driven by the announcement of sweeping reciprocal tariffs by the United States, impacting over 70 countries. These measures, aimed at recalibrating trade balances, have introduced fresh uncertainty into global supply chains and investor sentiment.

The U.S. Federal Reserve maintained its policy rate for the fifth consecutive meeting, despite inflation inching above its target. The Fed’s preferred gauge the PCE index rose to 2.6% YoY, prompting internal debate on the future path of rates. While bond yields remained sticky, equity markets found support from strong earnings in technology and AI-linked sectors, underscoring the resilience of secular growth themes amid macro volatility.

However, stretched valuations and signs of economic fatigue such as weak jobs data and slowing consumption suggest that the path forward may be volatile. Investors are increasingly weighing short-term risks against long-term structural opportunities.

Indian Equities: A Pause After a Strong Run
Indian equity markets underperformed global peers in July, reversing gains from the March–June rally. Benchmark indices declined ~3%, while broader indices saw sharper corrections, Midcaps fell ~4% and Small-caps fell ~6.7%. This pullback reflects a combination of rich valuations, muted earnings, and external shocks such as the newly imposed U.S. tariffs.

Sectoral performance was uneven. Healthcare and Consumer staples posted modest gains, while export-oriented and rate-sensitive sectors faced pressure. The imposition of a 25% tariff on Indian exports has emerged as a key overhang, particularly for sectors with high U.S. exposure. This development, coupled with geopolitical uncertainties and currency depreciation, has led to a cautious stance among foreign investors.

Earnings Season: Mixed Signals and Margin Pressures
The 1QFY26 earnings season began on a subdued note, dampening expectations of a strong recovery in FY26. While headline earnings growth was broadly in line with estimates, the underlying trends were mixed. Large caps delivered stable results, midcaps showed relative strength, and small caps lagged.

A notable feature of this season has been the increasing reliance on treasury gains and other income to support profitability, especially among cash-rich companies. Operating metrics, however, remain under pressure. Margin compression driven by soft volumes, limited pricing power, and muted operating leverage, was visible across segments, particularly in domestic-facing sectors.

Sectorally, Chemicals, Cement, Capital Goods, and Metals showed resilience in EBITDA growth, while Realty, FMCG, and Financial Intermediaries faced headwinds. Rural demand remained firm, supported by a normal monsoon and improving credit availability, while urban demand showed early signs of recovery in select pockets.

Flows and Valuations: Liquidity vs Fundamentals
Investor flows continue to reflect a divergence in sentiment. Foreign Institutional Investors (FIIs) turned net sellers in July, reversing a multi-month inflow trend, while Domestic Institutional Investors (DIIs) maintained their buying momentum. Monthly SIP inflows into mutual funds remain robust, consistently exceeding USD 3 billion, providing a steady liquidity cushion.

Valuations remain elevated across the board. The Nifty-50 trades at 21.1x forward earnings slightly above its long-term average while Midcap and Small-cap indices trade at significant premiums to their historical norms. This valuation gap, combined with earnings downgrades and rising supply from IPOs and QIPs, could create near-term pressure and keep indices range-bound.

Outlook: Disciplined Allocation in a Volatile Environment
The confluence of weak earnings, external trade shocks, and valuation concerns suggests that markets may consolidate in the near term. However, strong domestic flows, resilient macro fundamentals, and improving consumption trends provide a constructive backdrop for medium to long-term growth.

We continue to favour large-cap equities, given their relative earnings stability and valuation comfort. Within the broader market, we remain selectively positive on mid and small-cap names with strong earnings visibility and robust balance sheets. Our sectoral preferences remain aligned with domestic growth drivers; Overweight on Financials, Consumer Discretionary, Industrials, and Healthcare; Underweight on Oil & Gas, Cement, and Metals; and Neutral on Automobiles.

As always, volatility is an inherent feature of equity investing. A disciplined approach to asset allocation, combined with bottom-up stock selection, remains key to navigating this phase and capturing long-term value.

As always, volatility is an inherent feature of equity investing. A disciplined approach to asset allocation, combined with bottom-up stock selection, remains key to navigating this phase and capturing long-term value.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.