What to Expect from Stock Markets this Week after Friday’s Big-bang Rally

Indian stock markets saw a strong trend reversal on Friday when the government surprised the country by slashing the corporate tax rate to around 25% from 35% earlier. The Sensex and Nifty posted the best single-day gains in a decade on Friday, jumping by a whopping 5.3%, while the broader markets also traded in line with the BSE Midcap index rising 6.3% and Smallcap index gaining 4%.

By focusing on growth, the government has managed to turn the investor sentiment positive, which is likely to continue going ahead, but experts warn that an intermittent correction is likely. After Friday’s rally, stock markets could see some consolidation this week, taking cues from international as well as domestic developments.

“We have come out from this painful consolidation which was in effect from the last few weeks with a decisive close. Hence, any dip from here should be bought for a follow-up move,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

Calculating the effect of the cut in the corporate tax rate on earnings of companies will now become a key focus point ahead of the September quarter results. Analysts, fund managers and brokerage houses have released various reports over the weekend highlighting the companies and sectors that are expected to benefit the most from the government’s recent move. Hence, an earnings upgrade could start getting priced in well ahead of the earnings season.

“June-September quarter numbers will see massive upgrades in the earnings with a minimum of 10-15% increase in profits due to the tax cut reform. Valuations of all companies have now, therefore, become far more reasonable and competitive with rest of the world when compared to other emerging markets, this will hopefully bring the much needed FPIs (foreign portfolio investors) back to India,” Jimeet Modi, founder and CEO, SAMCO Securities and StockNote told Moneycontrol.

However, traders need to keep in mind that the September futures and options contracts will also expire on 26 September and positions will be rolled over to the next series. Consequently, some volatility later in the week can’t be ruled out.

At the international front, the meeting between Chinese and US delegates to be held on Thursday and Friday will be keenly watched. Both sides appear to be preparing for new rounds of talks to resolve trade war, hence any positive or negative development could draw a similar reaction.

Recently, trade war tensions between the two countries eased after China said it would restart purchasing US agricultural products that had halted in retaliation against US President Donald Trump’s tariffs.

Even US delayed its recent tariffs on $250 billion Chinese goods by 15 days to 15 October as a “gesture of goodwill” to China.