Q1 Earnings Disappoint, Market Eyes Liquidity For Recovery | Open Interest

The Nifty 50's earnings report card after the first quarter has fallen short of expectations. At the start of the quarter, forecasts for the ongoing fiscal year (FY26) indicated earnings growth of 11%. However, by the end of the quarter, Nifty 50 earnings grew only 3% year-on-year, well below projections, raising the risk of earnings downgrades.

Similarly, earnings per share for the Nifty 50 was estimated at 1,120 for FY26, implying a forward price-to-earnings multiple of 22 times at the current level. As a result of the mismatch after the first quarter earnings, rallies in the index are being sold into, given the lack of earnings support from its constituents.

Factors Behind Below Par Earnings

Several factors contributed to the weaker earnings. The US Federal Reserve's pause in interest rates reduced discretionary spending, weighing on technology sector performance. In addition, US banks and financial firms are increasingly moving IT operations in-house through Global Capability Centres, thereby cutting outsourcing to Indian IT companies.

The situation was further complicated by the Trump administration's tariff measures, which have created uncertainty for Indian exporters. A 25% tariff, followed by an additional 25% secondary tariff effective August 27, has rendered nearly half of India's US export basket uncompetitive. Apparel, leather and other labour-intensive sectors are among the worst affected, with Vietnam, Bangladesh and Cambodia likely to gain market share.

While pharma and semiconductor or telecom equipment (iPhones) have so far been exempt, pending Section 232 investigations could pave the way for graded tariff hikes, pushing more manufacturing back to the US.

At the end of the first quarter, annualised Nifty 50 earnings growth slipped to 9%, down from the earlier estimate of 11%. Analysts are increasingly shifting their valuation models to FY27, suggesting muted FY26 earnings. Further downgrades appear likely as tariff uncertainties continue to weigh on company performance. Nearly 60% of the Nifty constituents will struggle to meet the same EPS as FY25.

There were some bright spots in the consumption story. Consumer goods companies posted encouraging results in the first quarter, hinting at a demand recovery in urban markets, supported by higher disposable income from recent tax relief and above-normal monsoons that boosted rural and semi-urban demand. A potential GST rate rationalisation during Dussehra or Diwali could further enhance consumption.

If implemented, it could add Rs 1,000–1,500 per month (Rs 12,000–18,000 annually) in disposable income for households spending Rs 20,000–30,000 monthly. The crucial question is whether this surplus will fuel direct consumption, thereby driving corporate earnings, or flow into financial instruments like mutual funds, which would support the market primarily through liquidity. Either ways, the index will find support.

Government capital expenditure, which picked up towards the end of 2024 through tenders and project announcements, is yet to translate into visible traction, while private capex remains subdued amid global uncertainty.

The Road Ahead

According to Crisil, growth in the fourth quarter was largely driven by fixed investments, particularly government spending, even as private consumption slowed. Private investment, however, was likely dampened by fears of US tariff hikes.

Crisil has forecast GDP growth at 6.5% for FY26, though risks remain on the downside. External headwinds, especially the US tariffs, could weigh on industrial activity. On the positive side, strong agricultural output, easing inflation, potential rate cuts by the Reserve Bank of India, and income tax relief measures this fiscal could help domestic consumption provide support.

At present levels, the Nifty is trading at 22.5 times FY26 earnings. If earnings growth holds at 9% and the index re-rates to 25 times forward price-to-earnings, it could reach 27,500, representing an 11% upside. The key question is whether the index will be able to sustain earnings growth given the current mix of global headwinds and domestic uncertainties.