US IT hardware stocks faced significant pressure on Tuesday as Morgan Stanley downgraded the sector outlook, warning investors about a challenging environment characterized by slowing corporate demand and rising operational costs. The Wall Street brokerage moved its industry view from 'in line' to 'cautious', citing concerns over corporate technology leaders reducing their hardware spending plans amid broader economic uncertainty.

Market Impact and Stock Performance

The sector-wide selling pressure resulted in notable declines across major IT hardware companies. The IT hardware index dropped 1.1% at market open, reflecting broader market weakness and investor concerns about the sector's near-term prospects.

Morgan Stanley specifically downgraded both Logitech and NetApp from 'equal-weight' to 'underweight', contributing to their steeper declines during the trading session.

Survey Findings Reveal Weak Demand Outlook

Morgan Stanley's latest corporate survey painted a concerning picture for the hardware sector, revealing significant challenges ahead. The survey indicated just 1% year-on-year growth in hardware budgets for 2026, representing the weakest non-COVID reading in approximately 15 years. This dramatic slowdown in budget allocation reflects corporate caution amid economic uncertainty and changing technology priorities.

A separate survey conducted by the brokerage among value-added resellers provided additional insight into customer behavior patterns. The findings suggested that 30% to 60% of customers may reduce their planned purchases of PCs, servers, and storage equipment if price increases related to component inflation continue to persist.

Industry Challenges and Market Dynamics

Morgan Stanley analysts described the current environment as a 'perfect storm' affecting the IT hardware sector. The combination of slowing demand, input cost inflation, and what they characterized as rich valuations has prompted a more defensive investment approach heading into 2026. Rising component costs and supply chain bottlenecks continue to pressure manufacturers' margins while simultaneously affecting customer purchasing decisions.

While AI-driven demand has provided some support for hardware manufacturers, uncertainty surrounding potential tariffs under the current administration has created additional headwinds for the sector. Citigroup analysts separately noted on Monday that hardware companies and distributors are facing increasingly challenging conditions, including choppier enterprise demand, rising memory costs, and softer PC shipment projections extending into 2026.

Earnings Outlook and Risk Assessment

The brokerage expressed concerns about potential downside revisions to earnings estimates for 2026, particularly given the combination of higher operational costs and elastic demand patterns. Morgan Stanley noted that the current environment of elevated costs paired with price-sensitive customer demand creates greater risk for negative earnings surprises across the sector. This assessment reflects broader concerns about corporate technology spending patterns and the sector's ability to maintain profitability amid challenging market conditions.

India's top six IT services companies faced a substantial financial impact in Q3 FY26, absorbing a combined ₹5,400 crore one-time charge due to the implementation of new labour codes. The regulatory changes, which consolidate 29 existing labour laws, forced a structural shift in how companies calculate employee benefits, significantly affecting quarterly earnings across the sector.

Company-Specific Impact Analysis

TCS Bears Heaviest Burden

Tata Consultancy Services (TCS), the country's largest IT services exporter, reported the most significant impact with a statutory charge of ₹2,128 crore. This provisioning led to a 13.90% decline in net profit to ₹10,657 crore. The impact breakdown included ₹1,800 crore for gratuity and ₹300 crore for leave encashment. TCS CFO Samir Seksaria indicated the codes will continue affecting margins by 0.10-0.15% going forward.

Mixed Performance Across Major Players

Infosys reported a one-time exceptional charge of ₹1,289 crore, resulting in a 2.20% decline in net profit to ₹6,654 crore. CEO Salil Parekh noted the codes would create an ongoing annual impact of approximately 15 basis points on margins. HCLTech faced a ₹956 crore provision, dragging net profit down 11.20% to ₹4,076 crore, though the company indicated profit would have grown without this regulatory impact.

Tech Mahindra stood out as the only major player reporting profit growth, with a 14.00% increase to ₹1,122 crore despite setting aside $30 million (approximately ₹272 crore) for the new wage codes. CFO Rohit Anand cautioned the code would reduce margins by 0.20% quarterly.

Strong Operational Performance Despite Regulatory Headwinds

Revenue Growth Momentum

Despite profit pressures, companies demonstrated robust operational health with strong revenue growth across the board. The revenue performance highlighted the underlying sector resilience and demand strength.

AI-Driven Growth and Deal Pipeline Strength

The companies reported significant momentum in artificial intelligence services and strong deal pipelines. Infosys raised its FY26 revenue growth guidance to 3-3.5% in constant currency from the previous 2-3%, while securing large deal Total Contract Value (TCV) of $4.8 billion with 57% being net new deals.

TCS CEO K Krithivasan highlighted that AI and associated data revenues led topline growth, with COO Aarthi Subramanian reporting 17% quarter-on-quarter growth in AI revenues to an annualized level of $1.8 billion. HCLTech demonstrated exceptional performance with a 19.90% sequential surge in Advanced AI revenue reaching $146 million and $3 billion in net new bookings, up 43.50% year-on-year.

Strategic Positioning and Future Outlook

Company leadership expressed confidence in long-term prospects despite short-term regulatory impacts. Wipro's management described their pipeline as "very strong," driven by vendor consolidation and AI-led modernization. CEO Srini Pallia emphasized positioning for an AI-first world as artificial intelligence becomes a board-level mandate for global organizations.

Tech Mahindra secured new deals worth $1.096 billion during the quarter, with CEO Mohit Joshi asserting robust deal pipeline strength across geographies and verticals. The quarter showed divergent hiring trends, with TCS reducing headcount by over 11,151 employees while Infosys and Wipro added 5,043 and 6,529 employees respectively. HCLTech adopted a strategic shift toward hiring "elite engineers" at 3-4 times standard entry-level salaries to fuel AI ambitions.

The implementation of new labour codes represents a significant regulatory adjustment for India's IT sector, but the strong operational performance and forward-looking investments in AI capabilities demonstrate the industry's resilience and adaptation to evolving market demands.

Source: https://www.etnownews.com/companies/new-labour-codes-top-it-firms-including-tcs-wipro-infosys-and-tech-mahindra-take-rs-5400-crore-blow-in-q3-earnings-everything-explained-article-153474682