Tariffs, Trump, and turbulence: Why FY26 could be IT sector's toughest year yet

On March 20th, during the company’s earnings call, Julie Sweet—Chair and Chief Executive Officer of Accenture—told analysts that the Trump administration has slowed down new procurement, which is negatively impacting sales and revenue of Accenture Federal Services, a subsidiary that handles US government-related contracts and business. It brought in nearly 8% of global revenue and 16% of Americas revenue in FY24 for Accenture Plc.  

“In addition, recently, the General Services Administration has instructed all federal agencies to review their contracts with the top 10 highest-paid consulting firms contracting with the U.S. government, which includes Accenture Federal Services. The GSA's guidance was to terminate contracts that are not deemed mission-critical by the relevant federal agencies,” Julie said.  

As Indian IT services companies begin declaring their earnings for the full fiscal year 2025 and share their outlook for the new fiscal year, industry watchers are already gearing up for bad news. Analysts at PL Capital, in their sector update on March 27th, noted that Trump-era tariffs and any retaliatory tariffs from other nations will be detrimental to the IT services sector. While a gradual recovery in demand was visible in certain pockets until the last quarter of this fiscal year, that could now change.  

“Discretionary small-size deals are most likely to be pulled from the funnel, especially in the manufacturing, logistics, healthcare (owing to US Medicaid funding rejig), and retail/CPG verticals. Additionally, we believe cost-focused AI programs that have achieved some level of maturity will be infused into large deals and provide some respite to ACVs. We believe the ‘cost + AI’ theme will play out meaningfully in the current scenario,” the note said.  

With the United States being the largest revenue base for IT services companies, a slowdown in the economy due to tariffs and inflation would significantly impact sectors like manufacturing, retail, CPG, and travel, among others. However, a global slowdown would even make the largest technology-consuming BFSI sector tighten discretionary spending.  

Nomura’s Abhishek Bhandari, in his April 2nd note, stated that rising macroeconomic uncertainty due to tariff concerns in the US is likely to slow decision-making at clients, which could impact the pace of revenue growth improvement in FY26F for Indian IT companies. Considering Accenture’s recent results, though there is an indication that revenue growth may pick up in FY26, “In general, the first half tends to be important for the growth outlook of any financial year, and in FY26F, IT companies are likely to start with a soft Q1 due to a chain of recent macroeconomic events,” he noted.  

Nomura has lowered its revenue growth outlook for large-cap IT companies by ~230-350 basis points. “We expect Infosys and HCL Tech to largely have similar growth in FY26F as in FY25, while TCS is likely to grow slower (due to the lack of a BSNL project backfill),” the note added. According to their estimates, Infosys is likely to lead the pack in FY25 revenue growth at 4.6%, followed by HCL Tech at 4.3%, and TCS likely to touch 3.9% year-on-year growth.  

Another brokerage firm, HDFC Securities Ltd, in a note on April 4th, said that it expects the IT sector to provide “unexciting guidance for FY26E” amid rising global uncertainty.  

“The macroeconomic slowdown has become a baseline scenario, with lower discretionary spending and elongated deal cycles impacting the pace of recovery. Deal activity will be centered more around cost optimization/takeout initiatives,” it stated.  

As for FY26 growth guidance, HDFC Securities expects Infosys to guide for 2-4% growth, 3-5% for HCL Tech, and for Wipro’s Q1FY26E to be between -1% and +1.5% QoQ. The firm expects muted total contract values (TCVs) due to the absence of large mega-deals, with discretionary spending being hit by current macroeconomic uncertainty, pushing the recovery cycle further out.  

“We have moderated our growth estimates to account for a weak exit to FY25E and a modest start to FY26E. ER&D companies’ growth for FY26E is likely to moderate due to a potential slowdown in the transportation vertical (global OEMs). Growth dispersion between companies is expected to remain high even in FY26E. Tier-1 IT growth, which was anticipated to return to the pre-COVID level of ~8%, now appears to be an uphill task,” the note said.  

While India’s largest IT company, Tata Consultancy Services, does not provide an annual revenue guidance number, analysts are watching for what the company’s management says on the quarterly earnings call. Under the current uncertain trade environment, Kotak Institutional Securities expects higher scrutiny on ‘guidance’ numbers and anticipates that they could be conservative.  

Kotak’s Kawaljeet Saluja, in a note dated April 4th, wrote, “It may be prudent for companies to defer guidance until there is more certainty on the demand environment or restrict guidance to the next quarter, where there is a higher degree of visibility.”

While many analysts believe tariffs could further spur business optimization exercises, leading to Gen AI spending, Kotak further noted in the same report that uncertainty at the beginning of the year would lead to deferred decisions and impact growth in the crucial and seasonally strong June quarter.