IT Sector Faces Sharp Selloff Amid Weak US Economic Outlook
The Indian information technology (IT) sector witnessed heavy selling pressure on Monday, February 24, as concerns over weakening US economic indicators and trade policy uncertainties triggered a broad-based decline in IT stocks. The NIFTY IT index, which tracks the performance of major IT companies listed on the National Stock Exchange (NSE), fell as much as 2.97% or 1,205.75 points to touch an intraday low of 39,338.75.
Broad-Based Decline in IT Stocks
The selling pressure was widespread, with 9 out of 10 stocks in the NIFTY IT index witnessing sharp declines. The biggest loser was L&T Technology Services (LTTS), which slumped nearly 5% during intraday trade. Other IT heavyweights, including LTI Mindtree, Infosys, Wipro, Mphasis, HCL Technologies, Tata Consultancy Services (TCS), Persistent Systems, and Tech Mahindra, also saw significant declines ranging from 1.6% to 4%.
The only stock that managed to hold its ground in the index was Coforge Ltd., which remained resilient despite the overall bearish sentiment in the sector.
The sharp drop in IT stocks made NIFTY IT the worst-performing sectoral index on NSE, reflecting widespread concerns among investors about the financial outlook of Indian IT firms in the coming months.
Key Reasons Behind the IT Stock Decline
1. Weakening US Business Sentiment
A major factor weighing on Indian IT stocks was the deterioration in US business activity and consumer sentiment. The US is the largest market for Indian IT firms, contributing to a significant portion of their revenues. Any signs of economic slowdown in the US directly impact demand for IT services, reducing contract sizes and leading to spending cuts by American enterprises.
Recent economic data from the US raised alarm bells:
- The US Composite Flash PMI Output Index, which measures overall business activity, plunged to 50.4 in February from 52.7 in January.
- This marks the lowest level in 17 months, indicating a sharp slowdown in economic growth.
- The index had previously reached a three-year high of 55.4 in December, but the steep decline since then suggests a worsening economic climate.
According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, the sharp slowdown in US economic activity indicates that businesses are becoming increasingly cautious about their spending, which could hurt outsourcing demand for Indian IT services.
2. Trade Uncertainty and Tariff Fears
The uncertainty around US trade policies is another factor spooking IT investors. Reports suggest that former US President Donald Trump, who is expected to run for the 2024 US elections, is considering imposing new tariffs on Chinese imports.
- Trump had previously imposed a 10% tariff on all Chinese imports, significantly affecting global supply chains.
- He is now reportedly considering increasing tariffs to 25% on key sectors, including automobiles, semiconductors, and pharmaceuticals.
- If such measures are implemented, they could lead to higher costs for US businesses, prompting further spending cuts on IT services and outsourcing contracts.
Given that Indian IT companies are heavily reliant on outsourcing deals from US-based firms, any reduction in IT spending in the US could directly impact their revenue growth and profitability.
3. US Federal Budget Cuts and Layoffs
The deep spending cuts announced by the US federal government have also raised concerns about potential disruptions in IT spending. The Department of Government Efficiency (DOGE) has implemented widespread budget reductions, leading to job cuts across multiple government agencies.
Since several Indian IT firms provide technology services to US government agencies, the reduction in public sector IT contracts could pose another headwind for revenue growth in the coming quarters.
Sector Outlook: Can IT Stocks Recover?
Despite the recent downturn, the IT industry body NASSCOM remains cautiously optimistic about the long-term growth prospects of the Indian IT sector.
1. Revenue Growth Projections
- NASSCOM projects that the Indian IT sector will grow by 5.1% in FY25, reaching $282.6 billion in total revenue.
- By FY26, the industry is expected to surpass the $300 billion revenue mark, reflecting a 6% year-on-year growth rate.
While this growth projection is lower than previous years, NASSCOM believes that strong demand for digital transformation, AI, cloud computing, and cybersecurity solutions will continue to drive expansion in the long term.
2. IT Sector Job Growth
- The Indian IT sector continues to expand its workforce, with 1.26 lakh new jobs added in FY25.
- This takes the total tech workforce in India to 58 lakh employees, highlighting the resilience of the industry despite global economic challenges.
3. Digital Transformation as a Growth Driver
Indian IT firms are shifting their focus toward high-growth areas such as:
- Cloud computing
- Artificial intelligence (AI) and automation
- Cybersecurity solutions
- Data analytics and enterprise software
With global enterprises increasingly investing in digital transformation, Indian IT companies with strong capabilities in these domains could outperform their peers despite broader macroeconomic challenges.
Investor Takeaway: Should You Buy IT Stocks?
The recent correction in IT stocks has created a buying opportunity for long-term investors who believe in the sector’s structural growth story. However, short-term volatility remains high, given the uncertainties surrounding the US economy and trade policies.
Key factors to watch for investors include:
✅ US economic data – Any signs of a recovery in business sentiment could support a rebound in IT stocks.
✅ US election policies – The stance of the next US administration on trade and outsourcing will be crucial.
✅ Company-specific earnings – IT firms with strong digital capabilities and diversified revenue streams are better positioned to withstand near-term challenges.
Conclusion
The Indian IT sector faced heavy selling pressure on February 24, with LTTS, TCS, Infosys, Wipro, and HCL Technologies witnessing sharp declines amid concerns over a weak US economic outlook and potential trade policy changes. The broader NIFTY IT index fell nearly 3%, making it the worst-performing sector on NSE for the day.
While near-term challenges persist, the sector’s long-term growth potential remains intact, driven by digital transformation, cloud computing, and AI adoption. Investors should stay cautious and monitor global economic indicators before making investment decisions in IT stocks.
