TCS, Infosys Rally Up to 10% as AI Trade Pauses amid Global Chip Sell-off

TCS, Infosys Rally Up to 10% as AI Trade Pauses amid Global Chip Sell-off​

Shares of Indian IT majors surged on Tuesday, finding a reprieve after global concerns surrounding the hyper-focus and intense spending in the artificial intelligence (AI) sector. Investors rallied towards companies like Infosys, TCS, and HCL Tech after witnessing a sharp sell-off across AI-linked stocks internationally.

Nvidia, Micron, and SanDisk plunged up to 11% overnight in US trade. Furthermore, South Korean market saw significant declines as AI-focused giants SK Hynix and Samsung fell up to 10%. This global volatility provided a tactical opportunity for Indian IT companies.

Surge in Indian IT Stocks Amid AI Concerns​

The resurgence was led by major players across the board. Infosys rallied 3.3% to Rs 1,116, while TCS shares gained 4.4% to Rs 2,397 on the BSE. HCL Tech rose 3% to Rs 1,335, and Wipro edged 1.1% higher to Rs 180.50.

Midcap IT stocks witnessed particularly strong momentum. Coforge surged a significant 10% following a strong Q1 performance, indicating investor faith in smaller, focused entities within the sector. Persistent Systems also advanced by more than 4%.

Pressure on AI Stocks: What is Driving the Sell-off?​

The uncertainty surrounding concentrated AI spending continues to weigh heavily on semiconductor stocks globally. The central question for investors remains whether companies pouring billions into artificial intelligence will yield sufficient returns to justify the substantial capital outlay.

Developments originating from China have intensified investor caution regarding the chip market's trajectory. ChangXin Memory Technologies (CXMT) made a blockbuster market debut, soaring nearly 500%. Reports surfaced indicating that a Chinese state-backed entity has commenced production of immersion DUV lithography equipment.

Kim Seok-hwan, a Seoul-based analyst at Mirae Asset Securities, noted these developments. The market concern is rooted less in CXMT's immediate earnings and more in its potential for accelerated capacity expansion to challenge Korean industry leaders.

Analyst Perspective: A Tactical Recovery for IT Services?​

Amid the volatility, some analysts are signaling a positive turnaround, viewing the current pause as creating significant opportunities for Indian IT stocks. International brokerage firm Jefferies noted that interactions with over 50 FPI investors point towards a growing positive shift in sentiment toward India.

FPI flows have turned positive, and economic and corporate data points have recently surprised on the upside. Given that services companies are bearing the brunt of AI-related concerns, Jefferies suggests the pause in the aggressive AI trade could pave the way for a tactical recovery in the sector.

Jefferies has consequently closed its longstanding underweight call on IT services by adding Infosys to its model portfolio, while maintaining an overall neutral allocation to the IT sector. This move is being funded by trimming weights in power, realty, and hospitals stocks.

The State of the Sector: Valuation and Outlook​

The Indian IT sector has faced significant headwinds, declining 25% year-to-date. The top four majors—TCS, Infosys, HCL Tech, and Wipro—have seen declines of around 35-50% from their peaks over the past two years and currently trade at 13-17x PEs.

While revenue growth for these stocks is expected to remain in the low-to-mid single digits through FY26-28E, Jefferies maintains that a reversal in the AI trend could drive tactical upside, especially following such a sharp sectoral decline. The brokerage also observed that negative stock reactions to adverse sector news have softened significantly, suggesting a potential market bottom.

US Fed Policy and Global Market Influence​

The US Federal Reserve is scheduled to begin its two-day policy meeting on Tuesday and is widely expected to maintain interest rates unchanged on Wednesday. However, CME FedWatch reports expectations for at least a 25 basis point rate hike have increased to 36.3% from 16% a week prior.

Markets are now pricing in an 81% probability of a rate hike during the central bank's September meeting. US Federal Reserve policy holds significant influence over Indian IT stocks, impacting corporate technology spending and business confidence via interest rates. Furthermore, a stronger dollar can benefit Indian IT companies by boosting the rupee value of their overseas revenue streams.