AI Fears, Cheap Valuations And Weak Earnings: What's Really Driving India's IT Stocks?

Indian Information technology (IT) stocks staged a sharp comeback on Thursday, with the Nifty IT index climbing as much as 4.6% after suffering one of its steepest selloffs in recent years. The rebound came a day after the index slipped to its lowest level in more than five years, extending a four-session decline that had wiped out nearly 6.5% of its value. While easing geopolitical tensions and improving global risk appetite triggered bargain buying across technology counters, the broader story surrounding India's IT sector remains far more complex than a single-day rally suggests.

The sector has now corrected more than 33% from its February peak, making it one of the weakest-performing segments of the Indian market in 2026. The decline reflects a combination of concerns, including slowing discretionary technology spending, persistent macroeconomic uncertainty, pricing pressure arising from artificial intelligence, and growing investor anxiety over whether traditional IT services companies can protect their long-standing business models in an AI-driven world.

Large-cap names such as Infosys, Tata Consultancy Services, HCL Technologies, Wipro and Tech Mahindra have all witnessed substantial corrections despite continuing to generate healthy cash flows and maintaining strong balance sheets.

The recovery therefore raises an important question for investors. Has the market become excessively pessimistic about India's software exporters, creating an attractive buying opportunity, or is the recent correction merely reflecting a structural shift that could keep earnings under pressure for several years? Recent brokerage reports suggest both arguments contain elements of truth.

Why The Market Suddenly Returned To IT Stocks

Thursday's rally was triggered by a combination of domestic and global factors rather than any meaningful change in the sector's underlying fundamentals. Relief over easing geopolitical tensions reduced risk aversion across global equity markets, encouraging investors to rotate back into sectors that had experienced some of the sharpest corrections during recent weeks.

Technology stocks, having borne the brunt of selling pressure throughout the year, naturally emerged as beneficiaries of value buying. Several frontline companies had corrected to valuation levels significantly below their long-term averages, prompting investors to selectively accumulate beaten-down names. Mid-cap technology stocks led the recovery, with Coforge and Mphasis gaining around 6%, while Infosys, HCL Technologies, Persistent Systems, LTIMindtree and Tech Mahindra also posted strong advances.

Global developments also supported sentiment. Brokerage Guggenheim Securities challenged the increasingly popular narrative that artificial intelligence represents an existential threat to software companies. The brokerage upgraded several major global software firms, including Salesforce, ServiceNow and Check Point Software, arguing that current valuations were pricing in an excessively pessimistic outcome.

While acknowledging that AI would undoubtedly reshape software businesses, Guggenheim said treating the technology as a "death knell" for the industry was an overreaction. That assessment helped improve confidence in technology stocks globally, with software indices in the United States also recovering after months of underperformance.

Domestic market participants also pointed to changing global capital flows. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, observed that the AI-led rally which had powered markets such as South Korea was beginning to cool, as reflected in the correction witnessed in the Kospi index during June. If global investors gradually reduce their concentration in AI hardware plays, markets such as India that have underperformed during the AI boom could potentially witness renewed interest. While that does not automatically translate into stronger earnings for Indian IT companies, it provides some support from a valuation perspective after an extended period of underperformance.

Valuations Alone May Not Be Enough

Despite Thursday's recovery, most brokerages remain cautious about the sector's near-term outlook. The major concern is that the fundamental drivers behind the correction have not materially changed. Corporate technology budgets continue to remain under pressure, discretionary spending decisions are being deferred, and enterprises across developed markets are taking longer to approve large digital transformation projects amid an uncertain macroeconomic environment.

A recent report by Motilal Oswal Financial Services expects demand commentary from Indian IT companies to remain soft during the June quarter as macroeconomic uncertainty, geopolitical risks and AI-related disruption continue to weigh on client spending.

According to the brokerage, the weakness is unlikely to remain confined to the first quarter, with sluggish demand expected to extend into the second quarter as well. That outlook makes it increasingly difficult for large IT companies to maintain the upper end of their revenue guidance for FY27. Motilal Oswal expects Infosys to lower the upper end of its annual growth guidance, while HCL Technologies may also trim its services growth outlook as companies acknowledge slower decision-making cycles among clients.

Quarterly earnings expectations also remain subdued. The brokerage forecasts constant-currency revenue growth for large-cap IT companies to range between a decline of 1.5% and growth of just 2% during the June quarter, highlighting the absence of any meaningful demand recovery. While mid-cap firms are again expected to outperform because of stronger deal ramp-ups, overall sector growth remains well below historical averages. Margins are also likely to present a mixed picture, with wage hikes, deal execution costs, continued investment in AI capabilities and cross-currency headwinds limiting profitability improvements across much of the industry.

At the same time, valuation multiples have already adjusted significantly. According to Motilal Oswal, Tier-I IT companies are now trading roughly 30-40% below their long-term average price-to-earnings multiples. Even so, the brokerage argues that attractive valuations by themselves are unlikely to trigger a sustained re-rating.

Investors will require evidence that enterprise technology demand is stabilising, revenue growth is improving and AI-related opportunities are beginning to offset the pricing pressure currently weighing on the sector. Until that happens, stock prices may continue to remain range-bound despite appearing inexpensive by historical standards.

Is AI Really The Biggest Threat?

AI has undoubtedly become the biggest factor shaping investor sentiment towards Indian software companies. Yet the question is no longer whether AI will affect the industry — it already is. The more important debate is over the magnitude and timing of that impact. While some investors fear AI could permanently disrupt the traditional outsourcing model that built India's $250-billion IT services industry, others argue the market has begun pricing in an excessively pessimistic scenario long before the financial impact becomes fully visible.

Research from 360 ONE Capital suggests that the disruption fears are not entirely misplaced. Unlike previous waves of automation that largely improved employee productivity, the latest generation of large language models such as GPT, Claude and Gemini directly challenge the industry's long-established business model of billing clients based on engineering hours.

These AI systems can now generate, review, debug and explain software code with increasing sophistication, particularly for repetitive programming tasks that historically generated a significant portion of IT services revenue. As clients begin demanding productivity gains from AI, they are simultaneously becoming more aggressive in pricing negotiations, creating pressure on both revenue growth and margins.

The report notes that conversations with industry participants point to several emerging trends. Clients are increasingly asking vendors to pass on AI-driven productivity benefits immediately rather than allowing companies to retain those efficiency gains. Price competition has intensified as vendors become willing to sacrifice margins to secure large contracts, while enterprise-wide AI deployments remain at an early stage and have not yet generated sufficient new revenue opportunities to offset the decline in traditional services.

Large IT companies face an even greater challenge because they must protect vast existing businesses while adapting to a rapidly evolving technology landscape. This explains why several brokerages now expect industry growth to remain subdued over the next two years despite continued digital transformation spending.

That said, most analysts stop short of describing AI as an existential threat. Guggenheim Securities recently argued that software valuations are beginning to imply many companies will decline indefinitely because of AI, an assumption it believes is disconnected from reality. Although artificial intelligence is expected to reshape the economics of software development and IT services, analysts argue that enterprises will continue requiring consulting, implementation, integration, cybersecurity, governance and ongoing technology support. The transition therefore appears more evolutionary than catastrophic, even if it proves painful for incumbent business models during the adjustment period.

What Investors Should Watch

The June-quarter earnings season is likely to provide the clearest indication yet of whether the sector's correction has already captured the worst of the challenges facing Indian IT or whether further downgrades remain likely. Investors will pay particular attention not only to quarterly revenue and margin performance but also to management commentary on client spending, deal pipelines, pricing trends and AI monetisation.

Brokerages expect BFSI to remain the most resilient vertical, supported by ongoing technology investments and relatively stable demand from financial institutions. However, telecom, manufacturing and several discretionary segments are likely to remain under pressure as clients continue delaying non-essential technology spending. Guidance revisions from large companies such as Infosys and HCL Technologies will therefore carry greater significance than the quarterly numbers themselves, particularly if management teams acknowledge that the recovery is taking longer than previously expected.

The recent rebound in technology stocks suggests investors are beginning to recognise value after one of the sharpest corrections witnessed by the sector in years. Yet valuations alone are unlikely to sustain a longer-term recovery. For sentiment to improve meaningfully, companies will need to demonstrate that AI is beginning to create new business opportunities rather than simply reducing billable work, while clients will need to show greater willingness to resume discretionary technology spending.

Until clearer evidence emerges on both fronts, Indian IT may continue oscillating between relief rallies driven by attractive valuations and fresh bouts of selling triggered by weak earnings and cautious management commentary.