April Fools' shock: Worst financial year start for Sensex since 2020 crash. A harbinger of trouble?

April 1, 2025, was no joke for Indian stock markets, as investors faced the worst financial year-opening slump since the pandemic-era crash of 2020. The Sensex plunged 1.8% during the day, nosediving by nearly 1,400 points to flirt with the 76,000 mark, sending shockwaves across Dalal Street. The Nifty50 fared no better, marking a dismal start to FY26 amid a looming tariff scare ahead of April 2.

The steep sell-off was in stark contrast to April’s historically bullish trend—over the past decade, the Nifty has delivered positive returns in seven out of ten instances, averaging a 2.4% gain. However, this time, fears of potential trade hostilities between the U.S. and India, alongside concerns over domestic earnings, dampened investor sentiment as traders opted for a sell-on-rise strategy after upside seen in the previous two weeks.

Tariffs Hold the Key to Market Direction

Market watchers point to U.S. President Donald Trump’s expected tariff announcements on April 2 as the immediate trigger for market uncertainty. "If the tariffs are lower-than-feared, there could be a rally led by externally linked sectors like pharmaceuticals and IT. However, if the measures are severe, another round of correction is likely," said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited.


Foreign Institutional Investors (FIIs) seemed to have taken a cautionary stance, offloading Nifty stocks while midcap and smallcap indices showed relative resilience. This pattern suggests that FIIs, after recent bouts of buying, might be taking risk off the table ahead of geopolitical uncertainties.

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Valuations and Earnings: The Medium-Term Story

Since September 2024, the Nifty50 has corrected approximately 12% from its peak, with valuations cooling from 23.0x to 18.6x 1-year forward earnings—now closer to the 25-year mean of 17.2x. While some segments of the market may have seen a "mean reversion," analysts warn that not all stocks present value just yet.

"We believe that the mean reversion story has broadly played out, leaving limited downside from here. Bank Nifty valuations appear extremely attractive at levels below the 15-year mean. The margin of safety in the mid and small caps is limited, given that valuations are higher than +1SD with limited room for earnings disappointment," said Venkatesh Balasubramaniam of JM Financial.

Beyond the tariff overhang, concerns persist over a domestic economic slowdown and the pace of earnings recovery. While the upcoming Q4 earnings season is expected to be better than the previous three quarters, uncertainty looms. "We are still 1-2 quarters away from a phase of gradual earnings recovery," noted Viraj Gandhi, CEO of SAMCO Mutual Fund. Encouragingly, inflation has dipped to a seven-month low of 3.61%, largely due to softening food prices, which could aid rural demand and economic recovery.

A Roadmap for Investors

Market veterans are advising investors to moderate their return expectations. Record highs will likely remain elusive until there is greater clarity on sustained earnings growth.

"It is expected that in the next 2 quarters, based on greater government spending, easier lending conditions, and lower inflation expectations, the economy could see an upturn, which could signal higher corporate earnings. In my opinion, markets would do well to wait for evidence of higher growth before making a decisive move upwards," said Sandeep Bagla, CEO of TRUST Mutual Fund.

As FY26 kicks off with a tumble, investors may need to brace for near-term volatility. While April Fools’ Day turned into a market bloodbath, the joke—or relief rally—will depend on what unfolds next in Washington and on the domestic earnings front. Until then, it’s a game of patience and prudence.

(Data: Ritesh Presswala)