Indian stock markets are bracing for potential volatility as the US Supreme Court prepares to deliver a crucial ruling on the legality of tariffs imposed under the International Emergency Economic Powers Act (IEEPA). The verdict could significantly influence the performance of benchmark indices Sensex and Nifty, with market participants closely monitoring the outcome.

Market Impact and Expert Analysis

Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, highlighted the market's focus on the expected Supreme Court verdict. "After the sharp correction yesterday triggered by the possibility of about 500% tariff on India under the provisions of the Russia Sanctioning Act approved by President Trump, the market will be focused on the verdict expected today from the US Supreme Court on the legality of Trump tariffs," he stated.

The expert noted there is a high probability of the verdict going against Trump, though the specific details matter significantly. The market reaction would depend on whether the court delivers a partial striking down of the tariffs or completely declares them illegal.

India's Tariff Challenges

India faces a dual threat from US trade policies. The country has been significantly affected by existing 50% tariffs on Indian exports. Additionally, the newly approved Russia Sanctioning Act legislation authorizes a potential 500% tariff on countries importing Russian oil.

Harsimran Sahni, Head – Treasury at Anand Rathi Global Finance, explained the escalation: "The tariff dispute between India and the United States has escalated, with former US President Donald Trump approving legislation authored by Senator Lindsey Graham that would authorise the imposition of a 500 per cent tariff on countries importing Russian oil."

Economic Implications

The tariff situation presents several economic challenges for India:

• Trade Competitiveness: Higher tariffs could sharply raise the cost of Indian exports to the US
• Energy Costs: Elevated energy costs could strain inflation management
• Sectoral Impact: Export-oriented sectors face particular pressure from elevated US duties
• Macroeconomic Effects: Potential slowdown in economic growth affecting various sectors

Current Tariff Data

According to Chris Wood of Jefferies, Trump's tariffs are currently running at an annualized amount based on November data. Recent polling data indicates growing opposition to the tariff policies, with survey results showing significant disapproval among respondents regarding tariff handling.

Investment Opportunities

Despite the market uncertainty, some strategists see selective opportunities emerging from the recent pullback. Vijayakumar noted that segments like financials, consumer discretionary, and industrials have corrected due to overall market weakness rather than fundamental issues.

"In the sharp market pullback this week even stocks which will not be impacted by any draconian action by Trump have been affected," he observed. "Segments like financials, consumer discretionary and industrials that have corrected due to the overall market weakness can be accumulated now for long-term investment."

Market Outlook

The Supreme Court's decision represents a critical juncture for Indian markets. A favorable ruling could provide immediate relief to risk assets and boost corporate profits by lowering input costs and easing trade frictions. Conversely, upholding the tariffs could sustain higher costs across supply chains and delay capital expenditure decisions, leading to continued market volatility.

President Donald Trump's proposal to dramatically increase U.S. military spending has sent defence stocks soaring globally while raising significant concerns about fiscal sustainability. The announcement of a $1.5 trillion defence budget for 2027 represents a substantial jump from current spending levels and has created both opportunities and challenges for the defence sector.

Proposed Budget Increase Details

Trump indicated that the U.S. military budget for 2027 should be set at $1.5 trillion, marking a dramatic increase from the roughly $900 billion approved for the current fiscal year. This proposed expansion would require congressional authorization, though Trump's Republican Party holds narrow majorities in both chambers of Congress and has shown limited resistance to the president's spending priorities.

Moody's Fiscal Deficit Warning

Credit rating agency Moody's has issued a stark warning about the fiscal implications of such a substantial defence spending increase. The agency estimates that this move could significantly add to U.S. debt over the next decade, increasing interest costs and reducing fiscal flexibility. Any jump of the scale proposed by Trump would be difficult to offset through spending cuts or higher revenues elsewhere, given political and policy constraints, even if higher defence outlays provide a short-term boost to economic growth.

U.S. Defence Stock Performance

U.S. defence companies experienced a strong rebound after declining in the previous session, when investor sentiment had been affected by Trump's warning that American contractors could face restrictions on dividends and share buybacks unless they accelerate weapons production. The market response was overwhelmingly positive:

Smaller defence firms also saw strong gains, with Kratos Defense and AeroVironment jumping in double digits. These gains helped companies recover from losses of around 5% experienced the previous day.

European Defence Market Impact

European defence stocks initially extended their rally but later pared gains. The regional aerospace and defence index was up around 1.30% after touching a record high earlier in the session. The sector has surged since Russia's full-scale invasion of Ukraine in 2022, driven by expectations of sustained increases in European defence spending.

Capital Returns and Dividend Concerns

Concerns persist over the future of dividends and buybacks in the U.S. defence sector. Share repurchases are common across the industry, and several large contractors are consistent dividend payers. Analysts estimate that leading U.S. defence firms offer average dividend yields close to 2.00% and have collectively bought back close to 2.00% of their market capitalisation in recent years. While potential curbs on capital returns are seen as negative, analysts believe the overall impact would be manageable given the scale of the proposed budget increase.

Some market participants expect Trump's stance to encourage a rotation towards UK-based defence companies with significant exposure to U.S. contracts, including firms such as BAE Systems and other mid-sized suppliers. Analysts noted that the proposed rise in defence spending could more than offset concerns around potential limits on capital returns, although uncertainty remains over the final size and approval of the budget.