IT stocks lose steam amid Fed rate cut uncertainty, trade risks; Coforge and 6 other stocks fall up to 23% from peaks

The Nifty IT Index has continued to outperform (up 6.4%) the broader Nifty 50 index (up 4%) over the past year. However, this outperformance has narrowed in recent months due to uncertainty over potential Fed rate cuts and concerns about a possible escalation of the tariff war.

Adding to the pressure, IT stocks faced selling today, February 19, after French IT consulting firm Capgemini reported a weaker-than-expected financial performance. The company posted a 1.9% year-over-year decline in revenue for full year 2024, citing a challenging market environment, with particularly strong headwinds in France and the manufacturing sector.

Capgemini’s revenue fell to 22.10 billion euros in 2024 from 22.52 billion euros the previous year, as improvements in the financial services and consumer goods & retail sectors were offset by a slowdown in manufacturing, as per media reports. 

The company remains cautious about growth in 2025, particularly in the manufacturing sector and across Europe, and expects constant currency revenue growth in the first half of 2025 to remain in line with Q4 2024 levels.

For 2025, Capgemini has projected revenue movement in the range of -2% to +2% at constant currency. The company also expects an operating margin between 13.3% and 13.5% and aims to generate approximately 1.9 billion euros in organic free cash flow.

Meanwhile, Indian IT stocks experienced a strong rally between May 2024 and December 2024, driving a 34% gain in the Nifty IT Index. This surge was fueled by the U.S. Federal Reserve’s consecutive rate cuts, which boosted investor sentiment as lower interest rates were expected to drive higher IT spending in the U.S.

Additionally, Donald Trump’s victory in the U.S. presidential elections further supported the rally. His promises to cut corporate taxes and revamp the manufacturing sector were seen as catalysts for increased IT spending by companies, reinforcing positive market sentiment.

However, the rally stalled in January after the Federal Open Market Committee (FOMC) kept interest rates unchanged to assess the economic impact of Trump’s trade policies. Amid this, the Nifty IT index has tumbled 1.56% in January and another 4.26% in February so far, taking its YTD drop to 5.75% 

At current levels, seven stocks in the index have fallen between 10% and 23% from their respective one-year highs. Coforge and Mphasis have been the biggest laggards, declining by 23% and 19.5%, respectively. 

Experts believe that Trump’s series of announcements on tariffs for certain imported goods could increase domestic prices for U.S. consumers, making the Federal Reserve’s job more challenging in achieving its 2% inflation target.

Extending his goal of reducing the trade deficit with key trading partners, Trump stated on Tuesday that he intends to impose auto tariffs “in the neighbourhood of 25%” and similar duties on semiconductor and pharmaceutical imports.

Investors are now eagerly awaiting the release of the minutes from the Fed’s last meeting on Wednesday and continue to monitor developments of a possible Russia-Ukraine ceasefire agreement.

Results Review: Relative outperformance by Tier-2

During the December quarter, domestic brokerage firm ShareKhan stated that Tier-1 IT companies under its coverage reported a soft quarter, in line with expectations, due to seasonality and furloughs.

However, most Tier-2 companies under coverage reported relatively stronger revenue growth compared to their larger peers, with growth ranging from -1.1% to 8.4% quarter-on-quarter  in constant currency (CC). Among Tier-2 IT companies, the brokerage noted that Coforge led with sequential growth of 8.4% in CC, driven by strong organic growth along with contributions from the acquired Cigniti business.

EBIT margins for Tier-1 companies, except LTIM, improved by approximately 20–90 basis points (bps) QoQ, supported by margin improvement initiatives that helped offset wage hikes implemented during the quarter. Meanwhile, Tier-2 IT companies exhibited mixed EBIT margin trends, ranging from a decline of 30 bps to an increase of 90 bps QoQ.

The brokerage also observed that deal win momentum improved for most IT service companies on a year-over-year (y-o-y) basis, except for Infosys. The combined deal wins for its Tier-1 coverage companies grew 8% q-o-q and 13% YoY.

AI-driven transformation to drive IT spending

The brokerage stated that uncertainties surrounding Fed rate cuts and the escalation of tariff wars are likely to influence sentiment in the near term and may prolong the IT sector’s recovery. However, it remains positive on Indian IT companies for the medium- and long-term, as enterprises are expected to gradually increase their discretionary spending and undertake larger transformational programs to stay relevant and agile in an evolving, AI-driven landscape.

“We have greater confidence in Tier-1 IT companies and select Tier-2 IT companies, given their steady performance and relatively better valuations following the recent correction,” said Sharekhan.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.