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Indian equities reversed course this week to snap a two-week winning streak. Intensifying inflation concerns from surging crude oil prices overshadowed encouraging second quarter (Q2) earnings, failing to stem the sell-off. Small caps suffered the steepest losses as investors weighed improving profits against demanding valuations and pressure on margins. Brent crude spot traded at $110 a barrel on Friday, adding to concern over corporate costs and earnings. The Sensex lost 2.15% during the week, while the Nifty 50 declined 2.36%. On Friday, the Sensex fell 0.17% to 73,123.83, while the Nifty shed 0.39% to 22,600.00. The weakness extended well beyond the benchmarks, with all sectoral indices tracked ending lower. Capital goods, power and consumer stocks were among the hardest-hit. Small caps under pressure The Nifty Smallcap 250 index slumped 7.1%, its steepest weekly decline since the week ended 16 February 2025, when it lost 9.6%. The Nifty Midcap 150 and Nifty 100 indices fell 5.3% and 2.8%, respectively. Devender Singhal, senior fund manager at Kotak Mahindra AMC, linked the weakness to global selling, particularly in artificial intelligence (AI)-related stocks, which was also weighing on shares trading at high price-to-earnings multiples. He said some declines were occurring on low volumes, while a succession of large initial public offerings (IPOs) had temporarily absorbed liquidity, potentially reducing support for falling share prices. Anand K Rathi, co-founder of Mira Money, said smallcaps’ strong revenue growth had come at the expense of margins, while larger companies had better protected profitability. This made smaller stocks more vulnerable as high interest rates sharpened investors’ focus on earnings quality. Capital goods lead losses All sectoral indices tracked ended lower, led by a 7.5% decline in BSE Capital Goods. Power fell 6.4%, utilities lost 5.9% and realty shed 5.4%. Fast-moving consumer goods declined 5.2%, while metals and consumer durables dropped about 5% each. Singhal said capital goods and power stocks also had exposure to the AI and data centre investment theme, leaving them susceptible to the selling affecting that trade globally. Rathi attributed the divergence partly to concerns that persistently expensive crude could weaken earnings visibility in subsequent quarters. He also saw investors repositioning towards companies offering more reasonable valuations and credible growth prospects. Global markets diverge India was among the weaker global markets as equities delivered mixed returns. Indonesia’s Jakarta Composite gained 4.9% and Vietnam’s Ho Chi Minh index advanced 4%, while the US S&P 500 was nearly unchanged, edging up 0.06%. Hong Kong’s Hang Seng fell 4.5% and Japan’s Nikkei 225 lost 4%. Taiwan’s Taiex declined 2.3% and South Korea’s Kospi shed 2.1%. France’s CAC 40 fell 2.5%, close to the Nifty’s 2.4% decline. Earnings growth accelerates Despite market weakness, corporate earnings delivered an impressive show. A Mint analysis of 267 BSE-listed companies showed revenue rose 18.1% year-on-year in Q2 of fiscal year 2027 (FY27), while profit climbed 25.9%, the fastest growth for both measures in at least five quarters. Profit growth accelerated sharply from 9.1% in Q1FY27. The acceleration also benefited from a softer base in Q2FY26, when revenue grew just 2% and profit rose 8.2%. Singhal highlighted that the earnings season had started well and, although it remained early, there had been no meaningful downgrades so far. However, he cautioned that higher crude prices and borrowing costs could affect earnings in coming quarters. Rathi likewise said downgrades had been limited, but identified businesses dependent on global logistics as potentially exposed to sustained oil-price pressure. “Higher interest rates could also weigh on valuations by reducing the present value investors assign to future earnings. The tension is therefore between stronger reported growth and uncertainty over its durability. Aggregate earnings gains may offer limited reassurance where individual companies face margin pressure or demanding valuations.” Upcoming corporate earnings releases will test whether this momentum extends across broader industries. As key market leaders such as Tata Consumer Products, ACC, Larsen & Toubro, Tata Steel and Sun Pharma Industries report their results next week, management commentary on demand, costs and margins will be crucial in helping investors assess the durability of earnings growth.
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