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India's Growth, Earnings Outshine Election Worries

India's election uncertainties clash with strong economic indicators and earnings growth, fueling market optimism amidst inflation concerns.

By Athena Xu

5/16, 03:08 EDT

Key Takeaway

  • India's election uncertainties and foreign sell-offs contrast with strong economic indicators and a 12% expected earnings growth for Indian equities.
  • Mixed global data and steady U.S. economic indicators suggest moderate growth, potentially benefiting U.S. equities amid Federal Reserve's pause.
  • Market optimism persists despite stagflation risks, with the S&P 500 hitting its 23rd record high in 2024 amidst stubborn supercore inflation concerns.

Election Jitters and Market Fundamentals

As India approaches its election results, market volatility is anticipated to increase due to uncertainties surrounding the political landscape. Despite pre-election polls favoring the incumbent government for a third term, concerns have been raised following reports of low voter turnout, casting doubt on the ruling party's support base. This political uncertainty has led to a sell-off by foreign investors, particularly noticeable since the beginning of April and intensifying in May. However, the underlying economic indicators suggest a resilient foundation. Strong Purchasing Managers' Index (PMI) readings and stabilizing inflation levels underscore a robust economic environment. Additionally, while the widening trade deficit, partly due to elevated oil prices, signals increased domestic demand, it also points to sustained currency stability. Indian equities, despite being priced higher relative to their Asian counterparts based on 12-month forward price-to-earnings ratios, are buoyed by an anticipated earnings growth of approximately 12% year-over-year for the first three quarters of 2024.

Global Economic Indicators and Equity Markets

Recent global economic data presents a mixed picture, with retail sales figures coming in lower than expected, which could potentially fuel hopes for interest rate cuts without undermining confidence in corporate profitability. This scenario is further supported by Consumer Price Index (CPI) figures aligning with forecasts and real average hourly earnings growth, indicating sustained spending power among U.S. households. Such economic conditions, coupled with a Federal Reserve on pause, suggest a moderating growth trajectory that could benefit U.S. equities and financial assets broadly as global growth resumes.

Market Sentiment and Inflation Concerns

Market sentiment currently leans towards optimism, with equity markets reaching record highs amid expectations of a soft economic landing and potential Federal Reserve rate cuts. However, this optimism overlooks potential risks of stagflation, highlighted by a combination of economic slowdown and persistent inflation. The rise in supercore inflation, a key measure for the Federal Reserve, underscores the stubborn nature of price increases, posing a challenge to the prevailing risk rally. Despite these concerns, the S&P 500 has achieved its 23rd record high in 2024, with few immediate data releases expected to impact market momentum significantly.