The US-led advanced Western world played the leading role in ushering in a peaceful world order after World War II, which helped usher in economic growth and development. The collapse of the Soviet Union and the widespread adoption of the market economy model allowed many developing countries, such as India, to grow rapidly.The US-led democratic Western world played a key role in post-World War II growth and development. This leadership role is now under threat thanks to President Trump’s unconventional, uncertain, and wildly disruptive policies and actions.
What are the likely consequences of these disruptive policies for international trade, global growth and stock markets?
How should investors react to the unfolding events?
The first major disruption during Trump 2.0 came from the “reciprocal tariffs” announced in April 2025. Global stock markets reacted negatively to reciprocal tariffs, but soon most countries entered into bilateral trade deals with the US, averting a potential trade war. Fears that global trade and growth would be negatively affected by 2025 also turned out to be a false alarm, with global GDP and trade in 2025 now estimated to grow by 3 percent and 7 percent respectively.
Rate noise will lead to volatility in the short term
Weaponizing tariffs has become an integral part of policy under the Trump administration. Trump’s declaration that ‘Greenland tariffs’ would be imposed on eight European countries that opposed Trump’s plan to annex Greenland, and the united European bloc’s opposition to this, sparked fears of a trade war between the US and Europe. But soon Trump did a TACO (Trump Again Chickens Out) and the fear of a trade war died down.
It is also likely that the US Supreme Court will rule that the reciprocal tariffs are illegal, forcing a reconsideration of the tariff weaponization strategy. A diplomatic solution to the Greenland crisis cannot be ruled out either.
Whatever the outcome, the news and noise associated with the event will influence the market trend in the short term. However, the long-term trend will be determined by economic growth and corporate profits. Investors should focus on these fundamental factors.
Robust growth, but weak earnings growth
India’s GDP growth post-COVID-19 crisis has been impressive, with an average annual growth rate of 8.1% over the five years from FY22 to FY26, taking into account the advanced estimates for FY26. This makes India the fastest growing major economy in the world during this period.
Even though this is the low base of the Covid year, FY21 still makes this growth rate look impressive. It is a fact that India has been successful in achieving high growth despite many headwinds such as the Trump tariffs. The fact that this high growth was achieved with financial stability also makes the quality of the growth superior.
However, the significant weakness of this growth is that corporate profit growth declined after the initial spurt in FY21 to FY24. Corporate profit growth declined sharply from 24 percent CAGR in FY21 to FY24, to 5 percent in FY25.
The underperformance of the Indian market started with this sharp decline in corporate profits. In the final analysis, the market trend will be dictated by earnings growth. For a proper recovery of the market, profit growth must therefore revive.
Despite the many headwinds, the Indian economy is expected to grow 7.4 percent in FY26. However, the low inflation rate has reduced the nominal growth rate to an estimated 8.1 percent in FY26 from the budget estimate of 10.1 percent. This low nominal GDP growth has impacted earnings growth in FY26. With inflation rising to normal levels in FY27, nominal GDP growth and corporate earnings growth will improve in FY27, hopefully allowing for a moderate market recovery.
Stay invested and keep investing
In this VUCA world on steroids, geopolitical noise will influence the market, increasing volatility. Stock markets have an uncanny ability to climb all walls of worry. The markets will also climb the Trumpian wall. Personalities and events are temporary; economies and markets are permanent.
(The author is Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.)
(Disclaimer: Recommendations, suggestions, views and expert opinions are their own. These do not represent the views of the Economic Times)
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