Global money managers are returning to Indian software exporters after months of cautious approach, driven by companies' strategic pivot toward artificial intelligence capabilities. Foreign institutional investors purchased information technology stocks worth ₹4,500 crores in the fortnight ending December 31, 2024, marking the first significant buying since May, according to data from National Securities Depository Ltd.

AI Revenue Growth Drives Investor Confidence

The renewed investor interest stems from impressive AI revenue growth demonstrated by leading Indian IT companies during the December quarter. Major software exporters have shown substantial progress in monetizing their artificial intelligence investments:

"Confidence around business visibility is much higher, and that gives us comfort," said Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management. "The sector is now in a sweet spot, and we see this as a tradable opportunity."

Market Performance and Sector Outlook

The foreign buying has proven well-timed, as the NSE gauge of technology stocks is positioned for its best monthly performance against the benchmark Nifty 50 since November 2024. Analysts project improved growth momentum for the sector, with topline growth for Nifty IT Index components expected to accelerate to 8.70% in the fourth quarter from 6.80% projected for the October-December period.

Mixed Quarterly Results Present Challenges

Despite the AI-driven optimism, the sector faces near-term headwinds. Profits at India's six largest IT firms fell short of consensus estimates for the three months through December, as companies adjusted costs to comply with new labor regulations. Several major players experienced significant stock movements following disappointing results:

• Wipro Ltd. saw shares plunge 8% after reporting 9% decline in deal wins compared to the previous year
• LTIMindtree Ltd. experienced stock decline after third-quarter profits missed analyst estimates

Strategic AI Implementation Across the Sector

IT companies are demonstrating a unified approach to artificial intelligence integration, moving beyond pilot programs toward commercial implementation. From industry leaders to mid-tier firms like LTIMindtree, companies are focusing on embedding generative AI into delivery platforms and employee workflows while prioritizing efficiency-driven use cases over standalone AI offerings.

"With meaningful divergence in growth outlook of IT firms, a bottom-up approach is more suitable," analysts led by Akshat Agarwal at Jefferies Financial Group wrote. The brokerage maintains preference for Infosys and HCL Technologies among large-cap firms, Coforge Ltd. and Mphasis Ltd. among mid-caps, and Sagility Ltd. and Inventurus Knowledge Solutions Ltd. among small-caps.

Favorable Market Conditions Support Recovery

Beyond AI opportunities, software exporters benefit from a weakening rupee, which enhances their export competitiveness. The technology sector, representing nearly 11% of the Nifty 50 index, stands positioned to benefit from anticipated pickup in AI-related client spending.

"All big companies trailing estimates were a surprise, but operational performance and the AI opportunity are strong enough to revive hopes for the sector," said Karthick Jonagadla, founder of Mumbai-based Quantace Research & Capital Pvt. The combination of AI revenue growth and favorable currency conditions suggests potential for sustained recovery in the Indian IT sector.

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.