Over the weekend, India and Pakistan agreed to end four days of conflict, while the US and China agreed to slash tariffs for 90 days. Stocks took off in response, turning investors wealthier by ₹16 trillion, the most since 25 May, 2021.

The Nifty 50 shot up 3.8% to close at 24,924.70, while the S&P BSE Sensex rose 3.7% to 82,429.90, the biggest gain for both since 1 February, 2021. The BSE’s market capitalization touched ₹430 trillion, in a broad-based rally fuelled by both short-covering and delivery-based buying.

With the easing of tensions, focus now shifts to earnings, interest rates and consumption trends. While some see more stability and less volatility ahead, others expect emerging markets such as India’s to outperform in the coming years.

“With the ceasefire now in place, the hanging sword of uncertainty around potential economic damage has been effectively neutralized,” said A. Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life AMC Ltd. “With that risk out of the way, sidelined investors stepped in, and a bit of short-covering added to the momentum.” After last week’s fears that a prolonged conflict could cast drag the economy, the mood shifted quickly on Monday, he said.

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The rally was powered by IT and financial services sectors, with heavyweights such as Infosys, Larsen & Toubro, HDFC Bank, and Reliance Industries contributing the most to the Nifty’s gains. The enthusiasm was infectious, with all sectoral indices higher at close. The Nifty Midcap 100 and Nifty Smallcap 250 rose 4% each. One in eight stocks gained. On the NSE, 2614 stocks advanced while only 329 declined.

FIIs net bought shares worth ₹1246 crore and DIIs net bought shares worth ₹1448 crore on Monday, as per NSE. Since 5 May, FIIs have net bought shares worth ₹8634 crore and DIIs have net bought shares ₹11.898 crore. FIIs have been continuously buying for the last 17 sessions, except on 9 May  when they net sold shares worth ₹3798 crore.

The India VIX, the market’s fear gauge, tumbled 15%, signalling relief. According to Balasubramanian, the recent spike in volatility was more a knee-jerk reaction than a lasting trend. “Markets tend to react sharply to surprises. But as the noise fades, volatility will cool off and make room for a more stable, positive structure,” he said.

The weekly options data on NSE showed that option sellers, who had bet on the Nifty staying below 24,450, were caught off-guard and rushed to cover their positions. The surge in cash-based buying reflected in the NSE’s turnover which jumped to ₹1.07 trillion, up from Friday’s ₹94,551 crore. The Nifty could face resistance further at 25,350 and support at 24,500 this week.

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While tariff-related risks appear limited, stable oil prices, easing interest rates, and a recovery in mass consumption also aid earnings resilience, said Neelesh Surana, chief investment officer, Mirae Asset Investment Managers (India). He is optimistic about stocks in mass consumption sectors, particularly consumer discretionary, over the medium to long term.

Nilesh Shah, MD of Kotak Mahindra AMC, said the biggest worry was a potential escalation. That concern is now “undoubtedly behind us,” he said, allowing the market to return to basics—first, the de-escalation must sustain, and second, the market will once again be driven by earnings and liquidity flows.

March quarter earnings have been better than expected, Shah noted. Of the 109 companies that have reported earnings, profits were initially expected to decline by around 2%, but in reality, there has been a 6% growth—a positive surprise, he said. Nonetheless, Shah added a note of caution: Typically, the stronger results are reported earlier in the cycle, with weaker numbers coming later.

According to Saurabh Mukherjea, founder and CIO of Marcellus Investment Managers, the real winner from the US-China trade deal may be the US stock market. With uncertainty at home receding sharply, he believes capital outflows from the US won’t be dramatic. However, he cautions that tariff cuts between the two giants are more of a short-term patch than a long-term fix, as the US remains intent on reducing its reliance on Chinese imports.

Also read | Tariff gut punch sends markets reeling worldwide

In contrast, India finds itself in a sweet spot thanks to strengthening trade ties with the US. “India is poised to attract meaningful foreign inflows,” Mukherjea said.

The US has conditionally agreed to reduce tariffs on China, but the details—specific commodities, trade volumes, and currency agreements—are still unclear and will take time to evolve, said Sachin Relekar, senior equity fund manager of Axis Mutual Fund. “What the market is responding to is the fact that talks are happening.”

“While it is a positive signal, we’ll need to watch how the details unfold,” Relekar said. He added that it is more about bottom-up decisions like identifying the right themes, companies, and ensuring investors are not overpaying for a business.

Some believe 2025 will see the start of another structural bull market in emerging market equities. Justin Leverenz, CIO of developing markets equities at Invesco, sees a strong case for emerging market equities to significantly outperform in the coming years. He believes their performance hinges largely on two key drivers: China and the US dollar.

Following the announcement of the US-China agreement, the Bloomberg Dollar Spot Index surged as much as 1%, on track for its best day since 4 April.

“Beyond the dollar weakness, I also believe that global growth may inevitably shift towards Asia and Europe over the next few years as the US moves into recession,” he said in a note this month. Within Asia, he highlights China, India, and Southeast Asia as standouts, driven by expanding middle classes and robust domestic consumption.

(Ram Sahgal contributed to this story)

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