Up to 28% fall in one month. Will US stagflation mean more bad news for Indian IT stocks?

The sharp decline in US consumer sentiment to a 15-month low in February could signal more trouble for IT stocks, which have already fallen by up to 28% in the past month. Market experts advise investors to exercise caution in the IT sector while highlighting potential concerns.

After the University of Michigan’s Consumer Sentiment Index dropped to 64.7 from January’s 71.7, missing economists’ expectations, the Indian headline indices BSE Sensex and Nifty plummeted over 1% on Monday reacting to the development. IT stocks saw sharper cuts falling by up to 5% driven by concerns over tariffs and cost pressures.

Aamar Deo Singh, Senior Vice President – Equity, Commodity & Currency at Angel One, referred to this as a “double whammy,” as the dip in consumer sentiment follows higher-than-expected January inflation figures of 3% compared to 2.9% in December.

Higher inflation or a weaker US economy is detrimental to Indian IT companies, which derive a significant portion of their revenue from the US. A prolonged rate pause or a potential hike could lead to reduced IT spending.

The latest Federal Open Market Committee (FOMC) minutes from the meeting that concluded on January 29 revealed that the Federal Reserve wants to see further progress on inflation before considering rate cuts. It maintained policy rates at 4.25-4.5%, citing persistent inflation pressures.

While calling Monday’s market correction a knee-jerk reaction, Kranthi Bathini, Director – Equity Strategy at WealthMills Securities, noted that the Fed’s dilemma is not only delaying rate cuts but also the possibility of rate hikes, amid Donald Trump’s push for tariff parity with US trade partners.“Hasty decisions often lead to unintended consequences, and tariffs will have a negative impact on global economies,” Bathini added.Deo also pointed to austerity measures being implemented in the US under the Trump administration through Elon Musk’s Department of Government Efficiency (DOGE). He warned that these measures could impact federal spending and negatively affect Indian IT firms with large government contracts.

Monday’s market reaction was partly driven by these fears, Deo opined, predicting further corrections in the domestic markets led by IT stocks.

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IT stocks in soup

IT stocks’ underperformance has exceeded Nifty’s 2.3% correction in the last one month. At the index level, Nifty IT is down 9.4% with not a single gainer in the 10-stock index over the past one month. Six stacks have slipped in double-digits viz. Coforge, Mphasis, LTIMindtree, Tata Consultancy Services (TCS), Persistent Services and L&T Technology Services.

Meanwhile, stocks of HCL Technologies, Wipro, Tech Mahindra and Infosys have fallen between 8.3% and 5.9%.

Sonata Software and Intellect Design Arena, which are part of the Nifty MidSmall IT & Telecom index have had a worse fate falling 28% and 19%, respectively in this period.

The fall has been on Trump tariff rhetorics and valuation concerns in the domestic equities.

The FII money leaving Indian shores has been quite severe with equities worth Rs 1,05,168 crore sold on the year-to-date basis.

The silver lining was the IT sector attracting Rs 693 crore in FII flows in the first fortnight in February, also reflecting defensive buying amid global uncertainty.

Earnings Snapshot

Nifty reported its third consecutive quarter of low single-digit earnings growth and BFSI helped it salvage some pride with positive contributions from the technology companies.

While Nifty earnings grew by 5% on a YOY basis, the technology pack contributed 9% YoY in a seasonally mixed quarter with a median revenue growth of 1.8% QoQ CC. The guidance upgrades by major companies were also disappointing, a note by Motilal Oswal said.

JM Financial said that 67% of the IT companies beat Q3 estimates.

Companies also witnessed growth in their billing in the quarter under review while the hiring is picking up, noted Nuvama Institutional Equities as it counted high utilisation and attrition tracking below historical average, as tailwinds for the IT sector.

What should investors do?

While not ruling out near-to-medium term jitters, Bathini of Wealthmills said that the long term story for largecap IT companies remains intact and investors should look for opportunities in this space.

The largecap IT companies provide a comfort of stability and are more liquid along with greater propensity to deal with shocks, he reasoned. His top picks are Infosys, HCL Technologies and Wipro which should be accumulated and not bought in one go.

Echoing a similar sentiment, Deo suggests shifting towards largecap IT companies. He declined to give any stock recommendations.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)