Nifty IT jumps 21% in July, eyes best monthly rally in nearly six years despite global AI selloff

The NSE Nifty IT index extended its winning streak to a fifth consecutive session on Thursday, rising over 2% in intraday trade to emerge as the top-performing sectoral index. The sustained rally has lifted the index nearly 11% over the past five trading sessions and more than 21% so far in July, putting it on track for its strongest monthly performance in nearly six years.

In contrast, the benchmark Nifty50 has gained nearly 2% over the past five sessions and is headed for a monthly gain of around 2%. On Thursday, the 50-share benchmark rose as much as 0.3%, though geopolitical tensions and the U.S. Federal Reserve's policy outcome capped further gains.

The rally in the Nifty IT index was broad-based, with Wipro leading the gains, rising over 2%, followed by Tech Mahindra, Coforge, Persistent Systems, Infosys, and HCLTech. On the other hand, TCS and Oracle Financial Services Software were among the few laggards.

Valuation rebound, not earnings recovery

Market experts, however, cautioned that the sharp rebound is being driven more by improving valuations and a shift in sentiment than by a meaningful improvement in earnings fundamentals.

"The recent rebound in Indian IT stocks is largely in line with the recovery seen in global IT services companies, as investors booked profits in AI and semiconductor stocks after their sharp rally over the last five to six months," said Prasenjit Paul, Fund Manager at 129 Wealth Fund and Head Equity Analyst at Paul Asset.

He noted that while the Nasdaq-100 has corrected around 11% from its June peak, the Philadelphia Semiconductor Index has fallen roughly 25% from its record high, reflecting growing concerns over whether massive AI-related investments will generate sustainable returns.

"The same AI cycle is being judged very differently across the two markets. Global technology companies are facing questions over whether their heavy spending on chips, data centres and AI infrastructure will generate adequate returns. Indian IT companies, on the other hand, have been dealing with concerns that AI could reduce billable effort, pressure pricing, and weaken the traditional outsourcing model," Paul said.

According to him, the key question for investors is whether Indian IT is emerging as a relatively inexpensive alternative to richly valued global technology stocks or whether the recent rebound has run ahead of the sector's earnings outlook.

Growth outlook remains mixed

Paul pointed out that the backdrop remains mixed. Although June-quarter earnings were better than the market's worst expectations for some companies, they did not establish a broad-based return to growth. FY27 guidance across large IT firms remains modest, while management commentary continues to point to cautious discretionary spending and delayed project ramp-ups.

"Large-deal bookings are holding up, but deals are taking longer to translate into revenue. Clients are also seeking a share of the productivity gains created by AI. As a result, a large contract may no longer generate the same headcount, billable hours, or revenue that it would have produced earlier," he added.

He also noted that while the Nifty IT index is trading at around 20 times trailing earnings compared with nearly 32-33 times for the S&P 500 technology sector, the valuation discount needs to be weighed against weaker near-term growth prospects and the possibility of further earnings downgrades.

Paul further cautioned that Indian IT remains closely tied to U.S. and global enterprise technology spending, making constant-currency revenue growth a far more meaningful indicator than currency-driven gains.

Sentiment shifts after months of pessimism

Sharing a similar view, Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, said the July rally has been driven primarily by a turnaround in sentiment after valuations had fallen below historical averages.

"On July 1, when pessimism around Indian IT was at its peak and the Nifty IT index was near its bottom, we highlighted that valuations were below historical averages, earnings were making new highs, technicals were approaching long-term support, and positioning was at multi-year lows," he said.

"Since then, the Nifty IT Index has rallied about 17%. Nothing changed overnight. What changed was sentiment. Markets often reward investors who act on data rather than headlines," Sheth added.

Despite the sharp rebound, analysts believe investors should remain selective, as stronger earnings visibility, faster deal conversion, and a sustained recovery in global enterprise technology spending will be crucial in determining whether the rally can extend beyond a valuation-driven recovery.

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