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

The Indian IT services sector experienced a significant recovery from its losses in the first half of 2026, driven by favorable risk-reward conditions and anti-AI sentiment. Despite headwinds such as AI-related revenue deflation, reduced spending by US clients, and uncertain earnings visibility, most IT stocks have recovered a substantial portion of their losses after hitting their 2026 lows around mid-July.

The Nifty IT index, which had declined 32% for the year by July 1, has since recovered and is now down around 17%. Notable companies, such as TCS, which was down 38% at the start of July, are now down 26.5%, while Tech Mahindra, which was down 16% at its lowest, is up 2% for the year. Coforge, which slumped 35% at its lowest, is up nearly 9% for the year.

The recovery is attributed to cheap valuations, as the Nifty IT currently trades at around 19-20 times its year-ahead earnings (FY27), a significant discount to its 5-year average of 25-27 times. This has attracted investors seeking a valuation bet. Major fund houses, including Motilal Oswal, ICICI Prudential, and SBI MF, have become more positive about the IT services sector due to its strong risk-reward profile and a hedge against excessive AI investments globally.

During the April-June quarter, most IT companies reported robust deal wins, particularly in areas like vendor consolidation, digital transformation, legacy modernisation, and new outsourcing to save costs. Despite acknowledging the uncertain demand environment, these companies reported strong margins and profits. However, concerns about AI deflation, a subdued demand environment, high competition, and margin pressure persist for the upcoming quarters.

Interestingly, Indian IT stocks have also benefited from foreign institutional investors (FIIs) returning to the Indian market in July. FIIs bought Indian equities worth $2.1 billion in July, reversing a four-month trend of selling due to geopolitical uncertainty, falling crude oil prices, and the AI-heavy South Korean stock market crash. This positive shift in investor sentiment has contributed to the rally in IT stocks, as FIIs have continued to buy IT shares in August.