IT stocks recover most losses from first half of 2026 on favourable risk-reward, anti-AI bet

Some IT stocks have even moved into positive territory. Tech Mahindra, which had fallen around 16% at its 2026 low and was the best-performing large-cap IT stock, is now up 2% for the year. Coforge, which had slumped 35% at its lowest, is now up nearly 9% for the year.

Thus, while near-term concerns remain for the industry, IT stocks have rallied. So, what has changed for the sector?

Cheap valuations provide opportunity

The heavy correction in share prices at the start of the year has given investors an opportunity to accumulate IT stocks at attractive valuations, even as their trajectory remains uncertain.

Nifty IT currently trades at a valuation of around 19-20 times its one-year forward earnings (FY27 in this case), compared to the 5-year average of around 25-27 times. This has allowed institutions such as mutual funds to top up IT stocks as earnings remain more resilient than most had expected.

“The market has already discounted the news (of uncertain outlook projected by companies in Q1). There is no major negative news in sight currently, like a new model from Anthropic, which will incrementally impact IT services,” said Sumit Pokharna, an analyst tracking the sector at Kotak Securities.

“Most mutual fund guys still have a decent exposure in the IT sector. They realised that this is a good time to average (by accumulating more IT stocks), and they came on news channels and highlighted that they are looking to add more positions in IT because they believe most of the concerns are already priced in,” he added.

Major fund houses such as Motilal Oswal, ICICI Prudential, and SBI MF have recently turned more positive towards the IT services sector due to a strong risk-reward profile and a hedge against the exorbitant AI bets seen globally.

While data for the last month will only be available once the July-September quarter ends, the April-June quarter has seen domestic institutions add to their exposure across many IT companies. These institutions, including mutual funds, insurance companies, and pension funds, had increased their stake by 3 basis points in Wipro and by 6 basis points in TCS during the first quarter, data from the exchanges showed.

Strong anti-AI bet, FII inflows

The Indian IT sector also provides a strong anti-AI bet for investors, and has benefited from foreign institutional investors (FIIs) returning to the Indian market in July, according to experts.

FIIs bought Indian equities worth $2.1 billion in July, turning buyers after four straight months of selling as the geopolitical uncertainty eased, crude oil prices subsided, and the AI-heavy South Korean stock market crashed. This buying has continued in August.

“We have possibly seen FIIs also buy IT stocks as a strong bet against AI as they returned to India. It’s early to say if it’s a definitive change in trend or a short-term bet, with AI productivity still at a very nascent stage. We will have to wait and watch if more investors bet against AI, or if AI will surge again,” a fund manager tracking the sector at a domestic AMC said.

The crash of the AI-heavy South Korean market, which had more than doubled at its highest in 2026, coincided with the rise of Indian IT stocks. The Kospi index started crashing in late June and is currently down around 23% from its peak.

Data from the National Securities Depository Ltd showed that FIIs bought IT services shares worth $352 million in July, compared to the $788 million of IT shares they had dumped in the previous month. In fact, these investors turned positive on Indian IT stocks after five months of selling, during which they had dumped IT shares worth $3.5 billion.

Other global IT services companies have also seen a similar trend. Investors cheered for US-based IT major Cognizant even as it cut its growth estimates for 2026, as the company’s stock surged around 11% after its April-June quarter results, buoyed by growth in metrics such as margins and profitability. The stock has gained 44% since July. Other global IT majors like Accenture and Capgemini have also gained 24-42% during the period.

Q1 earnings offer some relief, longer-term outlook clouded

While revenue growth was subdued across the sector, profits and margins remained robust for most players during the quarter. Despite acknowledging the uncertain demand environment, most of these companies also reported robust deal wins, alleviating some near-term jitters.

“IT firms continue to win large deals across a wide range of themes such as vendor consolidation, digital transformation, legacy modernisation, new outsourcing to save costs, and GCC set-up. Deal wins were reasonable for TCS, Infosys and HCLT, muted for Wipro and healthy for TechM,” a report by Kotak Institutional Equities from last week noted.

However, while the performance was positive, concerns regarding AI deflation, a subdued demand environment, high competition, and margin pressure remain in the upcoming quarters. In fact, the AI impact of deflation has already started to show in Q1.

“Indian IT has started to feel the impact. The headwinds are manifesting as lower volumes/spending in software development programs and higher pricing pressure in managed services deals. These impact topline growth for the industry,” the report noted.

Thus, most experts view the IT sector’s rally as a short-term trade, driven by reasonable valuations and an attractive risk-reward profile. However, the sector’s longer-term outlook remains clouded, depending on factors such as earnings growth, the impact of AI, and the ability of Indian IT companies to meaningfully add to the AI value chain.