TCS, Infosys, Coforge, other IT stocks rally up to 10% after Nvidia-led chip rout. Is AI trade ending?

Shares of Indian IT majors surged on Tuesday, with Infosys, TCS, HCL Tech, Wipro, Coforge and Tech Mahindra gaining up to 10%, as investors looked to the sharp sell-off in global AI-linked stocks for signs of a potential shift in sentiment towards the sector. Nvidia, Micron and SanDisk plunged up to 11% in US trade overnight, followed by a steep sell-off in South Korea, where AI-focused stocks SK Hynix and Samsung fell up to 10%.

TCS shares gained 4.4% to Rs 2,397 on the BSE, while Infosys rallied 3.3% to Rs 1,116. HCL Tech rose 3% to Rs 1,335, and Wipro edged 1.1% higher to Rs 180.50. Midcap IT stocks outperformed, led by Coforge, which surged 10% following a strong Q1 performance, while Persistent Systems advanced more than 4%.

This development comes at a time when Indian IT companies face investor concerns over weak discretionary spending, pressure on pricing, wage costs and the impact of AI on traditional outsourcing revenue.

Why are AI stocks falling?

Fresh concerns over the scale of artificial intelligence spending added to the pressure on semiconductor stocks even as falling oil prices reacted to potential talks between the US and Iran.

The central question for investors is whether companies pouring billions of dollars into artificial intelligence will generate enough returns to justify the spending.

Developments in China added to investor concerns. ChangXin Memory Technologies (CXMT) made a blockbuster market debut, soaring nearly 500%, while reports emerged that a Chinese state-backed company had started producing 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 and technology development following its IPO," Kim Seok-hwan, a Seoul-based market analyst at Mirae Asset Securities, told Reuters.

Better times ahead for IT stocks?

International brokerage firm Jefferies in a recent report said its interactions with more than 50 FPI investors point to a positive shift in sentiment towards India as concerns around the AI trade grow.

FPI flows have turned positive, while economic and corporate data points have also surprised on the upside. With IT services stocks bearing the brunt of AI-related concerns, the brokerage said the pause in the AI trade could create room for a tactical recovery in the sector. It has therefore closed its longstanding underweight (UWT) call on IT services by adding Infosys.

The IT sector has declined 25% year-to-date, with the top four IT majors—TCS, Infosys, HCL Tech and Wipro—down around 35-50% from their peaks over the past two years and trading at 13-17x PEs. While revenue growth for IT stocks is expected to remain in the low-to-mid single digits over FY26-28E, Jefferies believes a reversal in the AI trade could drive tactical upside, particularly after the sector's sharp decline.

The brokerage also noted that negative stock reactions to adverse sector news have become much softer, indicating a potential bottom. Jefferies has added Infosys and increased its weight in Coforge in its model portfolio, taking its overall IT sector allocation to neutral. The move has been funded by trimming weights in power, realty and hospitals, which remain large overweight positions.

US Fed worries linger

The US Federal Reserve will begin its two-day policy meeting on Tuesday and is widely expected to leave interest rates unchanged on Wednesday. However, expectations for a rate hike of at least 25 basis points have risen to 36.3%, from 16% a week ago, according to CME FedWatch. Markets are now pricing in an 81% probability of a rate hike at the central bank's September meeting.

US Federal Reserve policy can influence Indian IT stocks through US technology spending, interest rates, economic growth and the dollar-rupee exchange rate. Higher rates can slow corporate tech spending, while rate cuts may boost business confidence and IT budgets. A stronger dollar can also benefit Indian IT companies by increasing the rupee value of overseas revenue.

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