Why is my damage so low?

[lolicon09]

Indeed your gear is decent, BUT you're in a FATE there, which means your level got lowered to the maximum permitted for that FATE. Now, as others already said, Potency is not the actual damage of your skill; It's just a way to easily see how big the actual damage will be in comparison with all other skills. For example, Kaeshi: Setsugekka is a Samurai skill with a potency of 1,200. It doesn't mean that a level 80 SAM will deal literally 1,200 damage, it just means the actual number will be pretty big (like 50k for example).