Information technology (IT) stocks posted their sharpest drop in over six weeks on Wednesday. Market players said the underperformance of the IT sector during previous rate cut cycles by the US Federal Reserve (Fed), coupled with Accenture’s decision to defer staff promotions, dampened investor sentiment. Experts also attributed the decline to profit booking following a sharp 25 per cent increase over the past three months.
Accenture corrected nearly 5 per cent on Thursday following news that the company has informed employees that most promotions will take place in June, instead of the usual December, due to a challenging consultancy environment.
The National Stock Exchange (NSE) Nifty IT Index ended 3.1 per cent lower at 42,089 on Wednesday — its biggest single-day decline since August 5. Mphasis fell the most, by 5.6 per cent, followed by Tata Consultancy Services at 3.5 per cent. L&T Technology Services, Persistent Systems, Infosys, and HCLTech also fell by over 3 per cent each.
“IT stocks are facing profit booking after the strong rally, as layoffs, an economic slowdown, and the depreciation of the US dollar are adding to the pessimistic view. Compounding this is the negative sentiment from Accenture delaying promotions for most of the staff by six months. The recent wave of layoffs in the tech industry and job cuts in companies like Apple, Cisco, IBM, and Intel have sent shockwaves through the IT sector,” said Vinod Nair, head of research at Geojit Financial Services.
The correction came ahead of the outcome of the Fed’s two-day monetary policy meeting and the central bank’s guidance on future interest rates.
According to experts, the expected rate cut will likely weaken the dollar, affecting the revenue growth of Indian IT players in the short term.
IT stocks have rallied over the past three months even as demand remains on a weak footing. The Nifty IT has logged major gains since June 2024 and is up almost 30 per cent since then. The sharp rise has led to valuation concerns.
Experts see demand picking up only three to six months after the first rate cut in the US.
“Unlike 2001, 2007, and 2019, this time IT spending has already been very constrained, and the extended downturn in spending that we have seen was not seen even in 2008 after the Lehman bankruptcy. Along with a good cyclical demand with big hardware changes (artificial intelligence servers), we expect services demand to pick up about three to six months after the first rate cut,” says Ravi Menon, IT services analyst at Macquarie, in a report.
The brokerage, in a note, highlighted the IT sector’s underperformance during the previous three Fed rate cut cycles.
The sell-off in IT stocks dragged the benchmark indices lower. The S&P BSE Sensex and NSE Nifty 50 ended the session 0.2 per cent lower despite logging gains in the first half. The Sensex declined 0.5 per cent from the intraday high to close at 82,948, while the Nifty 50 fell 0.4 per cent to 25,378.
“Except for banking and financials, all sectors ended in the red. Investors turned cautious ahead of the Fed policy meeting outcome. A 25-basis point (bp) rate cut is already discounted and could lead to profit booking in the market. However, a 50-bp rate cut by the Fed could bring some cheer to market sentiment,” said Siddhartha Khemka, head of research and wealth management at Motilal Oswal Financial Services.
China and the Bank of England will also announce their interest rate decisions on Thursday.
First Published: Sep 18 2024 | 9:05 PM IST
