IT stocks on a roll: TCS, Infosys, Coforge and others rally up to 5% for second straight day. What's driving this surge?

Indian IT stocks surged again on Wednesday, with Infosys, TCS, HCL Tech, Wipro, Coforge and Tech Mahindra gaining up to 5% as a sharp selloff in semiconductor stocks intensified amid growing investor concerns over Big Tech's massive AI spending.TCS shares gained 3.2% to Rs 2,476 on the BSE, while Infosys rallied 4.1% to Rs 1,152.

HCL Tech rose 2.3% to Rs 1,350, and Wipro edged 2.2% higher to Rs 185.

Midcap IT stocks outperformed, led by Coforge, which surged another 5% following a strong Q1 performance, while Persistent Systems advanced more than 3%.This development comes at a time when Indian IT companies are grappling with investor concerns over weak discretionary spending, pricing pressure, rising wage costs, and the impact of AI on traditional outsourcing revenues.AI trade over?“The AI trade is being viewed with a much greater degree of skepticism, and the shift in sentiment means it has become something of a one-way trade, with stocks being sold unmercifully,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, told Bloomberg.The recent pullback in the tech-heavy Nasdaq 100 signals a shift in sentiment toward some of Wall Street's biggest winners of recent years, as growing concerns over the rising cost of AI investments raise questions about when this spending spree will begin delivering meaningful returns.Developments in China have added to investor concerns.

ChangXin Memory Technologies (CXMT) made a blockbuster market debut, soaring nearly 500%, while reports emerged that a Chinese state-backed company had begun producing immersion DUV lithography equipment."The market's concern lies less in CXMT's current earnings and more in its potential for accelerated capacity expansion to rival Korean companies, as well as its technology development following the IPO," Kim Seok-hwan, a Seoul-based market analyst at Mirae Asset Securities, told Reuters.AI trade unwinding continuesAsian stocks extended their sharp selloff on Wednesday as concerns over stretched AI valuations, intensifying competition, and heavy spending weighed on investor sentiment ahead of key earnings from major technology companies and the U.S.

Federal Reserve's policy decision.South Korea's KOSPI fell as much as 12% during the day, reversing earlier gains after plunging more than 10% to a three-month low on Tuesday, despite strong earnings from SK Hynix.

Shares of the chipmaker tumbled 14% as investors digested results showing quarterly operating profit had risen more than sixfold but still fell short of elevated market expectations.

Samsung Electronics dropped another 10%, with the two companies together accounting for nearly half of the index's weight.MSCI's broadest index of Asia-Pacific shares outside Japan declined 1%, following a 3.6% fall on Tuesday, and was headed for an 8% monthly loss.

Japan's Nikkei slipped 1% and was on track to end July down more than 10%.IT stocks outlookInternational brokerage Jefferies, in a recent report, said its interactions with more than 50 FPI investors point to a positive shift in sentiment toward India as concerns around the AI trade intensify.The brokerage noted that FPI flows have turned positive, while economic and corporate data have also surprised on the upside.

With IT services stocks bearing the brunt of AI-related concerns, Jefferies believes the pause in the AI trade could create room for a tactical recovery in the sector.

It has therefore closed its longstanding underweight (UWT) stance on IT services by adding Infosys to its portfolio.The IT sector has declined 25% year-to-date, with the top four IT majors—TCS, Infosys, HCLTech and Wipro—trading about 35%–50% below their peaks over the past two years and at 13–17x P/E multiples.

While revenue growth is expected to remain in the low-to-mid single digits over FY26–FY28E, Jefferies believes a reversal in the AI trade could drive tactical upside, particularly after the sector's sharp correction.The brokerage also noted that negative stock reactions to adverse sector news have become much milder, indicating that the sector may be nearing a bottom.

Jefferies has added Infosys and increased its weight in Coforge in its model portfolio, taking its overall IT allocation to neutral.

The move has been funded by trimming exposure to power, real estate, and hospitals, which remain its largest overweight positions.US Fed: Near-term pressure?The US Fed is widely expected to keep rates unchanged at its policy meeting today.

However, expectations of a 25-basis-point rate hike have risen to 36.3% from 16% a week ago, according to CME FedWatch.

Markets are now pricing in an 81% probability of a rate hike at the central bank's September meeting.The US Federal’s policy stance can significantly influence Indian IT stocks through its impact on US technology spending, interest rates, economic growth, and the dollar-rupee exchange rate.

Higher interest rates can weigh on corporate technology budgets, while lower rates may improve business confidence and boost IT spending.

A stronger US dollar also benefits Indian IT companies by increasing the rupee value of their overseas revenue.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own.

These do not represent the views of The Economic Times) ...