Concerns escalated after AI startup Anthropic said its Claude tool can help streamline COBOL code, raising fears of disruption to long-standing revenue streams for technology companies. The announcement sent ripples through global tech stocks. To put things into perspective, shares of IBM plunged 13% overnight, marking the company’s worst single-day selloff in about 25 years.
In today’s session, IT stocks tumbled up to 8%. Coforge, Persistent Systems and HCLTech led the losses with declines of about 7-8%. Shares of Infosys, Tech Mahindra, Mphasis and Tata Consultancy Services fell roughly 4-6%. The Nifty IT index tanked a staggering 6%.
Following the historic correction, the Nifty IT index now trades at an eight-year low relative to the Nifty 500, drawing the attention of contrarian investors hunting for value. Is this the right time for the long term?
Valuations cheap, but is that enough?
Experts caution against rushing in.“The sector is in a flux along with heightened fear. If the growth risks do not materialise, there is scope for meaningful returns. However, clarity on long-term growth is essential before becoming decisively positive. In a sector which is facing disruption, cheap valuation alone will not suffice,” S Naren, ED and CIO at ICICI Prudential AMC told The Economic Times earlier.Alok Agarwal, Head Quant and Fund Manager at Alchemy Capital Management, echoed the concern. He noted that the weakness predates the current AI anxiety. Over the last 3, 5 and 10 years, the IT sector’s earnings growth has largely remained in single digits or barely scraped into double digits.
Also read: How IBM’s 13% plunge on Anthropic’s COBOL push triggered Indian IT selloff
In his view, this reflects sustained underperformance driven by commoditisation of services, pricing pressure and sluggish demand from key Western markets. Now, layering AI disruption on top of that could further weaken the earnings trajectory.High dividend yields and attractive free cash flow yields may appear comforting, but they are backwards-looking metrics. If growth erodes further, cash generation could suffer, making those yields less sustainable. Until companies demonstrate concrete strategies to pivot towards AI enablement, move up the value chain or achieve genuine cost transformation, the risk-reward may remain unfavourable even over a 4 to 5 year horizon, he said.
Technical picture deteriorates
Anand James, Chief Market Strategist at Geojit Investments, said oscillators had turned oversold and showed early signs of positive divergence in recent days. However, the latest breakdown has pushed the index below the 13 February reaction low of 31,422, with momentum indicators favouring further downside. Standard deviation studies indicate 29,961 as the nearest support, followed by 28,800 and 27,200 in the event of a deeper slide. On the upside, 30,300 intraday and 31,300 on a closing basis are immediate reversal levels, while 36,200 remains a major resistance.
Sachin Gupta, VP Research at Choice Broking, said the index slipped into a clear bearish phase after breaking down from a Head and Shoulders pattern on the weekly chart. The fall below the crucial 10-month low of 30,918 confirmed a structural trend reversal. The breach of the 61.8% Fibonacci retracement level and a negative crossover of key moving averages, commonly referred to as a Death Cross, suggests that the earlier buy-on-dips strategy has now shifted to sell-on-rise. He sees further downside towards the 29,300 to 28,700 zone unless a strong global trigger, particularly stability in the Nasdaq, improves sentiment.
Ajit Mishra, SVP at Religare Broking, said the index has formed a pattern of lower highs and lower lows, highlighting weakening momentum. Immediate support is seen around 29,600, with a major support zone near 26,300. On the upside, any rebound towards 33,000 to 34,000 could invite fresh selling pressure. He advised traders to avoid fresh long positions and instead look for shorting opportunities on rebounds.
More pain or opportunity?
The valuation discount is real, but so are the fears. If AI-led disruption proves incremental rather than existential, the sharp correction could offer meaningful upside over time. But if it materially compresses demand for traditional IT services, the pain could linger. But for now, experts recommend adopting a wait-and-watch strategy.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)