Sensex, Nifty: Will hot US inflation send domestic stock market tumbling?

A higher-than-expected CPI inflation print sent Wall Street shares tumbling earlier this week. While the domestic stock market was shut on Thursday on account of Eid al-Fitr, Asian markets were largely mixed. The repricing of Fed rate cut expectations, stronger dollar, higher oil prices and improving exports have raised the bar to cut rates and increased the risk of a delayed easing in Asia, Nomura warned.

The hot US CPI print raises risk of a near-term pullback in stocks including some Asian equities markets which had done well recently, including India and Korea, due to profit taking, it said.

"Near-term pullback in stocks due to profit-taking is likely: With US inflation continuing to prove stickier than expected given the third straight miss, this is clearly not a good reading for stocks, in our view," Nomura said.

That said, on a multi-month view, Nomura remains modestly constructive on Asia ex-Japan stocks. "We would recommend long-term investors use any pullback as an opportunity to increase allocation (particularly in AI/chip-related sectors in Korea, Korea Autos, and India where we assess the fundamental outlook as still relatively constructive)," it said.

The US core CPI inflation remained elevated at 0.4 per cent month-on-month in March and The strength was concentrated in core service prices, it said.

Vinod Nair, Head of Research, Geojit Financial Services said the domestic market is marginally overvalued, even as India’s valuations have contracted year-to-date from a one-year forward PE of 23 times to 20 times.

"The timing and extent of future interest rate cut will play a pivotal role in shaping stock momentum for the remainder of the year. It is imperative to closely monitor potential delays in rate cuts and any deceleration in earnings growth. Earnings growth in India is showing signs of contraction, with EPS growth expected to moderate to 5-10 per cent in Q4 compared to the robust 25% experienced between April and December 2023," Nair said.

While investors are hoping for a pre-election rally, Kotak Institutional Equities noted that valuations today are much higher than pre-2014 and pre-2019 election periods, which would suggest the market’s extremely high confidence about a ‘favourable’ result outcome and forceful post-election policies. More clarity will emerge over the next few days once the BJP’s election manifesto becomes available, it said.

At 11.20 am, the BSE Sensex was down 365.34 points or 0.49 per cent at 74,672.81. Nifty stood at 22,684.90, down 68.90 points or 0.30 per cent.