Nifty futures are flat despite most Asian markets trading higher this morning and US equities closing strong last week. Although India’s ceremonial Muhurat session on Friday sparked a rally, bulls are clearly on the backfoot due to continued selling by foreign funds and the weakening in second-line stocks. 

Raining earnings downgrades as economy slows

The weakness in the economy is finally starting to show up in corporate earnings. Last week, Jefferies Financial Group Inc. reported that over 60 per cent of the 98 firms it tracks have had their earnings per share estimates downgraded following recent quarterly results. This is the highest proportion since early 2020, when the Covid-19 pandemic upended economic activity for months. Jefferies now forecasts that the earnings of Nifty companies will grow at just 10 per cent in the year ending March. 

Small-ticket loan defaults show household stress

Rising defaults in unsecured loans — a reflecting of growing financial stress in households — has investors worried. This is leading lenders to re-think their strategy to hard-sell micro, personal and credit card loans. With the central bank stepping up its scrutiny of banks, companies that mainly focus on unsecured credit — like CreditAccess Grameen and Equitas Small Finance Bank — are finding they have little choice but to curb lending. This could weigh on their stock prices in the short term.

No relief for IT in sight despite earnings boost

The Nifty’s gauge of software exporters was the worst performer on Thursday, tumbling 3 per cent to its lowest level in over two months. Even though most IT firms reported decent second-quarter results and showed an improved business outlook, investors aren’t bitting at higher prices. Kotak Institutional Equities points out that many IT stocks are trading above Covid-era valuation peaks, despite growth not being anywhere near those levels. While IT stocks rebounded strongly from their June lows, the recovery has also reduced the margin of safety for investors.

And, finally... 

The short-term correlation between Indian and US stocks ahead of the crucial presidential election in the world’s largest economy is weakening. That means any poll-induced gyrations in the US stock market should impact the South Asian nation to a lesser extent. That’s good news for investors, but not so much for traders who thrive on volatility. That said, Indian stocks have underperformed the US market in dollar terms during both the Trump and Biden presidencies. With the economic growth slowing domestically, it’s uncertain if this trend will change.

--With assistance from Alex Gabriel Simon and Kartik Goyal.

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