With some relief, the Indian market was expected to digest optimism to sign an intermediary trade deal with the US, however, the clampdown by the US Supreme Court has brought a new set of uncertainty to the global market. Firstly, the US has reset the tariff to a universal 15%, diluting India’s expected relative advantage over Asian peers. Secondly, this has slowed down the process of interaction. While confusion has emerged regarding the huge refund to be paid to American corporates. Moreover, Trump is wondering about deploying norms to bring back its tariff policy, which could be difficult, though. While this week US charged India Solar imports at 126%. This had triggered consolidation at the start of the week. Yet it is understood that talks between the US & India are expected to be renewed, and India holds a strong trade agreement with key countries like the EU, UK, Australia, and Oman, positioning itself as a competitive manufacturing and export hub.
Large-cap vs small-cap
Domestically, the small-cap segment remains as one of the most debated areas to invest in. Valuation bandwidth had significantly expanded over the past 3–5 years. Even after recent corrections, small caps continue to trade above +1 standard deviation valuation. On a 10-year basis, valuations are more than 35% above the historical mean, indicating stretched pricing. After undergoing a downgrade cycle during FY25, India Inc. is witnessing a pickup in broad-based earnings growth of 20% in the last 9 months. Despite this, in this disruptive world, the large caps category continues to provide safety and sustainability in investment strategy. Though small caps have undergone a good degree of correction, they lack the ability to attract high investments as valuations continue to be high.
The chance for further re-rating in small cap valuation is low. For this we need a meaningful revival in FII flows, which continue to be dull. Foreign investors remain cautious due to India’s premium valuations and evolving global policy dynamics. In a high-risk environment marked by AI-driven disruption, geopolitical tensions, and elevated global bond yields, small caps are trading at a premium to large caps. This advice is for the retail investors to adopt a calibrated approach, limiting small-cap exposure with a selective approach to around 10–15% of an overall equity portfolio.
The correction in IT sector continued emerging as a key source of volatility in recent weeks. Concerns around AI-led disruption, shifting client spending patterns, and margin compression weigh on the sentiment. Global enterprises are reassessing discretionary tech budgets, while advances in generative AI are reshaping traditional outsourcing and service companies. Investor sensitivity to developments in US big tech stocks with high capex and high US bond yields continues to affect the trend of IT stocks.
However, lately the degree of correction in the IT space has reduced, as the AI-based disruptive view for big techs and service providers has moderated. New apps are hardly expected to cause a long-term damage rather a transition. While structural demand for digital transformation persists, near-term growth visibility remains clouded by shortened deal cycles and pricing pressures. Clarity on AI monetization strategies and stabilization in global macro conditions will be essential for restoring investor confidence. From a long-term point of view, the Indian IT space is considered as a good strategy for buying, as valuations are attractive, though it stays dull for some time.
The IT sector correction has spread to real estate stocks, particularly Bengaluru-based developers. Given Bengaluru’s heavy dependence on technology employment, fears of slower hiring and AI-driven workforce disruption have triggered a knee-jerk reaction on property counters. Additionally, delays in certain project approvals and launches due to administrative bottlenecks have weighed on near-term revenue visibility. Any sustained slowdown in technology hiring could act as a near-term overhang on housing demand. However, these hurdles appear temporary, and developers continue to report robust project pipelines and healthy demand, especially in the mid-income and premium segments. While valuations have become more reasonable post-correction, the sector may remain sensitive to IT-sector trends in the short-term.
The author Vinod Nair is the Head of Research, Geojit Investments.
Disclaimer: This story is for educational purposes only. Please consult with an investment advisor before making any investment decisions.
