Synopsis: Despite headlines blaming U.S. tariffs for India’s stock underperformance, the real issue is domestic. Indian equities remain expensive, trading at high valuations while earnings growth has slowed, leaving markets vulnerable. Global peers have weathered trade tensions better, showing that fundamentals and pricing, not tariffs alone, are driving the weakness.
For months, analysts and investors have blamed rising tariffs and trade tensions, especially between the U.S. and its major trading partners, for the slow performance of Indian stocks.
Headlines often link Indian market weakness to global geopolitics, suggesting that external pressures are weighing on valuations and returns. While trade policies do matter, the numbers show that this story doesn’t tell the full picture. Other emerging markets have performed well despite tariff worries, and India’s relative lag points to bigger issues.
The Tariff Argument
One of the most widely discussed bearish factors in 2025 and early 2026 has been the imposition of tariffs by the U.S. on a range of imports from countries including India. Reports from institutional sources note that tariffs introduced mid-2025 disrupted trade flows and triggered short-term market volatility, particularly in export-sensitive sectors like pharmaceuticals, textiles, and jewelry. Moody’s Ratings also warned that higher U.S. tariffs could hamper India’s manufacturing push and slow broader growth, projecting a modest drag on GDP growth and flagging capital outflows following tariff announcements.
There’s no denying that tariff hikes can have real economic effects, including higher costs for exporters, pressure on profit margins in exposed industries, and shifts in global investment flows. However, India’s exports to the United States account for a relatively small share of GDP compared with China’s much larger trade exposure, which limits the direct macroeconomic impact of tariffs on India’s economy. More importantly, other emerging markets facing comparable or even greater trade and tariff-related risks have still delivered far stronger equity returns.
India vs. Emerging Market Peers
In calendar year 2025, the MSCI India index posted only modest returns of around 2.5 percent in U.S. dollar terms, while the broader MSCI Emerging Markets index surged nearly 28 percent over the same period. This marks one of the widest performance gaps between India and its emerging market peers in decades.
Looking more granularly at local indices reinforces this point. The Taiwan Weighted Index, and even the Shanghai Composite Index have shown stronger performance in recent sessions and annual comparisons than Indian benchmarks such as the Nifty 50 and MSCI India. Over the past one year, Taiwan’s TAIEX has gained around 35 percent, while China’s SSE Composite Index has risen about 28 percent, even as India’s Sensex has grown by just 7 percent. This divergence suggests that tariff concerns alone are insufficient to explain India’s relative market underperformance.
These figures are striking because tariffs and trade tensions have not spared those economies either. Yet markets like Mexico and Taiwan have so far shrugged off those headwinds with stronger equity gains, something India has not managed to do to the same degree. If tariffs were truly the overriding variable, markets exposed to similar trade environments should show comparable strain. But they haven’t, which suggests markets are pricing other fundamentals more heavily.
Valuations
One of the clearest reasons behind India’s weaker performance is expensive valuations. Recent data show that Indian equities continue to trade at much higher multiples than most other emerging markets. As of October 2025, the MSCI India index was valued at around 25.2 times trailing earnings, compared with about 16.2 times for the MSCI Emerging Markets index. This shows that Indian stocks are still much more expensive than their emerging market peers.
While the valuation gap has narrowed somewhat from pandemic-era extremes, India still sits at a historically elevated premium compared to the average emerging market multiple. That matters because higher valuations reduce the margin of safety for investors and mean any disappointment in growth or earnings tends to hit prices disproportionately harder than in cheaper markets.
This premium has also influenced capital flows. Analysts have pointed to inconsistent foreign portfolio investment into Indian equities, in part because global funds see better risk-reward ratios in markets that trade at cheaper multiples. In short, Indian equities did not enter the tariff cycle from a neutral valuation position. They were already priced higher relative to peers, which likely amplified investor sensitivity to any negative news, tariff or otherwise.
Earnings Growth
Valuations on their own don’t drive markets; they matter in the context of earnings. In India’s case, earnings growth, while positive, has moderated from earlier boom phases. Corporate profit growth for major Indian companies slowed materially in FY25 and early FY26, which in turn lowered earnings upgrades that traditionally support higher equity valuations. This slowdown came just as markets were already elevated by years of strong performance.
By contrast, certain emerging market economies have been riding through sector-specific tailwinds. Taiwan’s technology sector, for example, has benefited significantly from global semiconductor demand, translating into higher earnings and stronger equity performance. Mexico has enjoyed nearshoring inflows that have boosted investor sentiment. These earnings differentials help explain why those markets have outpaced India even in a difficult global environment. The mismatch between already high valuations and slowing earnings momentum in India makes the market more vulnerable to disappointments, something that simple tariff narratives fail to capture.
Liquidity, Interest Rates, and the Bigger Macro Picture
Another often overlooked factor is liquidity conditions and interest rate dynamics. Post-Covid, India experienced a long period of easy domestic liquidity, which helped fuel sustained rallies in equities as investors chased yield and growth narratives. However, as global liquidity conditions tightened and interest rates normalized, markets began to demand stronger corporate earnings to justify high multiples. With earnings growth slowing, the high valuations became harder to defend.
At the same time, the Reserve Bank of India has maintained relatively higher interest rates compared with some global peers, making equities slightly less attractive relative to other asset classes at certain points. These macro forces interact with tariff concerns but are fundamentally different in nature, they are structural factors that shape capital allocation across markets.
Conclusion
In the final analysis, it would be wrong to say that tariffs alone are the main reason behind the weakness in Indian equities. Tariffs have certainly added uncertainty and caused short-term volatility, but they are not enough to explain why Indian markets have underperformed other emerging markets. The bigger issue lies at home. Indian stocks are trading at relatively high valuations, while earnings growth has slowed meaningfully over the past few quarters. This combination leaves the market exposed, where even a small negative trigger can lead to outsized corrections.
Tariffs may dominate headlines, but valuations and fundamentals are doing the real damage beneath the surface. When markets are priced for strong growth but earnings fail to keep pace, any external shock, whether global trade tensions, geopolitics or interest rate concerns, tends to hit harder. Until corporate earnings start showing a clear and sustained recovery, or valuations come down to more comfortable levels, Indian equities are likely to remain sensitive to both global news flow and domestic challenges.
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