Indian IT sector stocks after declining for the most part of this year have been rallying strongly over the last few sessions. They extended their rally on Wednesday, with shares of Infosys, TCS, HCLTech, Wipro, Coforge and Tech Mahindra climbing as much as 5%, even as semiconductor stocks worldwide came under intense selling pressure amid mounting concerns over the scale of artificial intelligence-related spending by major technology companies.On the BSE, TCS rose 3.2% to Rs 2,476, while Infosys jumped 4.1% to Rs 1,152. HCLTech gained 2.3% to Rs 1,350 and Wipro added 2.2% to Rs 185. Mid-cap IT companies outperformed their larger peers, led by Coforge, which rallied another 5% after reporting a strong first-quarter performance. Persistent Systems also advanced more than 3%.The gains came even as India’s IT sector continues to face headwinds, including subdued discretionary technology spending, pricing pressure, higher employee costs and uncertainty over how artificial intelligence could affect conventional outsourcing revenues.
AI optimism under scrutiny
“The AI trade is being viewed with a much greater degree of skepticism, and the shift in sentiment means it has become something of a one-way trade, with stocks being sold unmercifully,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, told Bloomberg.The recent correction in the technology-heavy Nasdaq 100 reflects a changing mood among investors toward some of Wall Street’s biggest outperformers in recent years. As spending on artificial intelligence continues to rise sharply, markets are increasingly questioning when these investments will begin generating meaningful returns.Fresh developments in China have further unsettled investors. ChangXin Memory Technologies (CXMT) made a spectacular stock market debut, with its shares soaring nearly 500%, while reports also indicated that a Chinese state-backed company had started manufacturing immersion DUV lithography equipment.“The market’s concern lies less in CXMT’s current earnings and more in its potential for accelerated capacity expansion to rival Korean companies, as well as its technology development following the IPO,” Kim Seok-hwan, a Seoul-based market analyst at Mirae Asset Securities, told Reuters.
AI-driven market rally loses steam
Asian equities remained under pressure on Wednesday, extending the previous session’s steep losses as investors grew increasingly uneasy about lofty artificial intelligence valuations, rising competition in the sector and the scale of spending by technology companies. The cautious mood prevailed ahead of earnings from major global tech firms and the US Federal Reserve’s monetary policy announcement.South Korea’s KOSPI swung sharply during the session, falling as much as 12% after recovering from Tuesday’s drop of more than 10%, which had taken the index to a three-month low. The decline came despite robust earnings from SK Hynix. Shares of the memory chip maker slumped 14% after investors judged that, although quarterly operating profit had increased more than sixfold, the results failed to match the market’s elevated expectations. Samsung Electronics shed another 10%, with the two companies together accounting for nearly half of the benchmark index.MSCI’s broad Asia-Pacific index excluding Japan declined 1%, adding to Tuesday’s 3.6% slide and putting it on course for an 8% decline for the month. Japan’s Nikkei also lost 1% and was headed for a monthly fall of more than 10%.
Outlook for Indian IT stocks
Global brokerage Jefferies said in a recent report that its discussions with more than 50 foreign portfolio investors (FPIs) indicate improving sentiment towards Indian equities as enthusiasm around the AI trade begins to fade, according to an ET report.According to the brokerage, FPI flows have turned positive, while both macroeconomic indicators and corporate earnings have exceeded expectations. With IT services stocks having borne the brunt of concerns surrounding artificial intelligence, Jefferies believes the cooling of the AI trade could open the door for a tactical rebound in the sector. Reflecting this view, it has ended its long-held underweight position on IT services by adding Infosys to its model portfolio.The brokerage noted that the IT sector has fallen 25% so far this year. The country’s four largest IT companies, TCS, Infosys, HCLTech and Wipro, are currently trading around 35% to 50% below their highs of the past two years, with valuation multiples of 13-17 times earnings. Although Jefferies expects revenue growth to remain in the low-to-mid single digits between FY26 and FY28, it believes the sharp correction has created scope for a near-term recovery if sentiment towards the AI trade reverses.Jefferies also observed that adverse sector developments are now triggering much smaller declines in share prices, suggesting the sector could be approaching a bottom. In addition to adding Infosys, the brokerage has increased its allocation to Coforge, taking its overall exposure to IT to a neutral stance. The changes have been funded by trimming positions in power, real estate and hospitals, which continue to be its biggest overweight sectors.(Disclaimer: Recommendations and views on the stock market, or any other asset classes or personal finance management tips given by experts and analysts are their own. These opinions do not represent the views of The Times of India.)
