From worst to best: How IT stocks staged a Rs 2.6 lakh crore revival this week

ETMarkets.com

For the week, Tech Mahindra led the index with a gain of over 16%, followed by Wipro at 13%. TCS, Infosys and HCL Tech each advanced 12%. The rally is significant given that FIIs and other investors had fled IT stocks earlier this year as AI-linked stocks gained momentum amid heightened concerns over slowing demand and earnings.

What helped IT flip the script?

1.) AI’s $1 trillion plunge - US stocks linked to the artificial intelligence trade fell on Thursday, extending a global sell-off that has wiped out more than $1 trillion in market value from 20 of the world's most valuable AI and semiconductor companies so far this week. Concerns over interest rate hikes, AI financing and intensifying competition weighed on investor sentiment.

Tensions flared further after OpenAI told investors last week that its annualised revenue for September was nearly $50 billion, lower than the figure it had indicated earlier, Reuters reported. At a separate event, the company had previously told investors that its September revenue run rate was approaching $70 billion.

2.) Q2 earnings come at an opportune time - IT companies have posted better-than-expected earnings. India’s largest player TCS reported 15% year-on-year (YoY) growth in its consolidated net profit at Rs 13,884 crore for the second quarter. The same stood at Rs 12,075 crore a year ago. The Board has declared a second interim dividend of Rs 12 per share for the financial year 2026-27.

In constant currency terms, revenue rose 0.5% quarter-on-quarter. Operating margin came in at 24%, while net margin stood at 19%. CEO and MD K Krithivasan said the company saw broad-based growth across international markets and most industry segments.

3.) Global giant Accenture forecast growth - At investor day, Accenture’s Chief Executive Officer Julie Sweet pushed to dispel fears that new technology poses a major threat to the consulting industry.

“The opportunity is bigger than ever before,” she said. “While AI does have the potential, with AI efficiencies, to impact our business more than ever before, we again believe that ultimately, the new demand that will be created, will far exceed the demand that’s being replaced.” Accenture's commentary is closely watched as an indicator of global demand for technology services.

4.) AI’s capital roadblock - Earlier this week, Broadcom’s Hock Tan said capital could become a bigger constraint on AI expansion than shortages of semiconductors, memory chips or electricity. Intel CEO Lip-Bu Tan echoed the concern, flagging the rising cost of capital and the need for companies investing heavily in AI to demonstrate adequate returns.

The warnings come as investors reassess the sustainability of the AI-driven rally amid stretched valuations, intensifying competition and uncertainty over when heavy AI investments will translate into profits. Meanwhile, South Korea’s tech-heavy market plunged over 6% on Tuesday as the selloff in AI-linked stocks deepened.

IT stocks outlook

VK Vijayakumar, chief investment strategist at Geojit Investments, said strong results from major IT companies and positive management commentary had triggered a sharp recovery in the IT index, helping the Nifty remain resilient. He added that the improvement could provide fundamental support to the broader market.

Axis Securities however remains cautiously optimistic about the IT services sector. "For the Indian IT sector, the pace of global AI adoption over the next 2-3 years remains a key concern for earnings growth and valuations.

However, if questions arise globally around the commercial viability of AI, potentially slowing its rollout, market concerns over Indian IT companies could ease," said Krishna Sanghavi, CIO Equity, Mahindra Manulife Mutual Fund.

"The sector may remain positive in the near term, supported by improving sentiment and buying interest following HCLTech's results, but after a sharp rally, some profit-booking and volatility cannot be ruled out," said Gaurav Garg, head of research at Lemonn Market desk.