Is Wall Street Losing its Grip on Market Influence? India, China Signal a Shift

When this year's economic survey pointed out the possible correction in the US markets and its eventual 'cascading' effect on the Indian stock market, the reaction on Dalal Street wasn’t as sharp as one might expect. This is largely because historically, there has been a strong correlation between US and Indian equity markets. In fact, between 2000 and 2024, there were 22 instances when the S&P 500 fell more than 10% and the Nifty50 index also ended up in the red nearly every time.

However, this longstanding correlation seems to be weakening. Over the past two years, the equity markets of Asia's giants—India and China—have exhibited their lowest correlation with the US market in recent history. Yes Securities' Executive VP mentioned in a report that the correlation of Indian and Chinese markets with the S&P 500 has dropped to 0.39 and 0.20, respectively, compared to their 10-year averages of 0.54 and 0.30.

Heightened volatility and macro turbulence have a lot to do with this shifting trend. And this disconnect might grow even further if Trump’s tariff-driven playbook pushes the world toward a new economic order.

No Longer Taking Cues from Wall Street?

While it's hard to completely agree with this as the first week of April witnessed global markets falling on Trump's tariff play and flip-flopping policy stance, the long-range data tells a different pattern.

In just a single month period (since March 17), the Dow Jones Industrial Average has plummeted over 5.19%. Meanwhile, BSE Sensex has surged over 5.9% during the same period (as of April 17). Even on a year-to-date basis, the Indian equity market has mostly stayed rangebound, while US markets have remained in the red territory.

Analysts believe that the shift can be largely attributed to domestic macroeconomic factors and countries adopting different policy play to counter the impact of Trump’s tariff policies. Federal Reserve's 'higher-for-longer' stance on inflation contrasts with India's more accommodative stance to boost liquidity in the system. These differing cycles are creating contrasting investment dynamics.

"Unlike the US, which is focused on combating inflation through high interest rates, India is navigating a balance between growth and inflation, while China is implementing rate cuts to stimulate its slowing economy," said Ajay Garg, CEO, SMC Global Securities.

"Local factors are also playing a significant role in this divergence. India's emphasis on digital infrastructure and manufacturing, coupled with China's shift towards consumer spending and technology, are contributing to this independent market movement," he further added.

Plus, the factors driving the course of the stock market have also evolved. While the tech industry drives sentiment in the US, India's market has gained more depth in recent years with increased retail participation.

"Sectoral divergences further amplify this decoupling (between the US and Indian stock market). US markets remain heavily tech-centric and globally exposed, making them more vulnerable to rate hikes and global shocks. In contrast, India’s growth is increasingly driven by internal factors—urbanisation, a rising middle class, and evolving business models," said Akshat Garg, AVP, Choice Wealth.

What does it mean for investors?

Analysts expect this trend to continue amidst global uncertainty, which could eventually attract global investors in search of unique opportunities in these markets. While the weakening correlation of Indian and Chinese equities might persist, both markets are unlikely to remain completely immune to global events.

"A slowdown in the US economy and a weaker dollar could further boost capital flows into India and China. While India and China may continue to chart their own course, their markets remain susceptible to significant global events," Garg said.

At the same time, some analysts also believe that domestic investors might already have factored in the current market scenario. But it would be early to say that major movements in the US markets would not impact Indian or Chinese markets, said Aamar Deo Singh, senior VP-research at Angel One. "Investors need to play it safe in the current quarter," Deo said.