Why Do IT Stocks Keep Falling ? What Investors Need to Know

If you have been following the markets recently, you would have noticed that IT stocks are not falling just once and then recovering. They decline, attempt a small rebound, and then face selling pressure again. TCS moves lower, Infosys struggles to hold gains, Wipro remains weak, and even short recoveries in the Nifty IT index do not last long.

What makes this situation confusing is that there is no major negative news. There has been no large earnings miss, no governance issue, and no sudden drop in demand. Most leading IT companies are still reporting stable revenues and healthy profits.

So why are the stocks under pressure? The reason is not related to current performance. It is linked to changing expectations about future growth.

This Is Not a One-Time Panic Reaction

While one of the recent triggers came from AI developments in the United States, including tools like Claude Cowork that demonstrated the ability to execute complex business tasks, the ongoing weakness in IT stocks is not about a single product launch. The market is adjusting to what appears to be a structural shift in how IT services may evolve over the next five years.

For years, Indian IT companies were viewed as predictable compounders with steady double-digit revenue growth, strong margins, and long-term global demand visibility. That perception is now being reassessed. Investors are beginning to question whether the growth trajectory of the past decade can realistically continue in an AI-driven environment.

Growth Expectations Are Being Reset

A key factor behind the persistent selling is the downgrade in long-term growth assumptions. Global brokerage Jefferies recently projected that overall IT services spending may grow at only 1.5 to 3 percent CAGR between 2024 and 2029. This represents a significant slowdown compared to the double-digit expansion the sector enjoyed in earlier years.

Even if companies remain profitable and operationally strong, slower growth changes how markets value them. Stocks are priced not just on current earnings, but on expected future growth. When that growth expectation moderates, valuations adjust downward accordingly.

This gradual resetting of growth forecasts explains why the decline in IT stocks feels continuous rather than dramatic. The market is slowly recalibrating its assumptions.

AI Is Challenging the Traditional Billing Model

Indian IT companies largely operate on a manpower-driven services model, where revenue scales with the number of engineers deployed and the time billed to clients. This model has worked well in a world where digital transformation required large teams working on development, maintenance, testing, and support.

However, artificial intelligence introduces a fundamental shift. If AI tools allow one engineer to accomplish the work that previously required multiple professionals, clients may not be willing to pay for the same team sizes.

Jefferies estimates that AI could impact nearly 20 percent of existing global IT services revenue by 2030. Importantly, this impact is not framed as a sudden collapse, but as revenue deflation driven by productivity gains.

In a services business, higher productivity does not automatically translate into higher revenue. It can also mean fewer billable hours and pressure on pricing.

Productivity Gains May Compress Margins

According to Jefferies, AI could drive a 5 to 35 percent productivity boost across consulting, application services, infrastructure services, and BPO. While this appears positive at first glance, the revenue implications are more complex.

High-margin segments such as application managed services and BPO are expected to see stronger AI-led disruption compared to consulting or infrastructure. If automation reduces the intensity of human effort required in these segments, clients may renegotiate contracts at lower prices.

This creates a scenario where revenue growth slows while margins face pressure. Even if companies succeed in adopting AI internally to reduce costs, the pricing power in competitive global markets may limit how much of those gains they can retain.

AI-Led Revenue Deflation May Come Before AI-Led Growth

One of the more critical observations made by Jefferies is that AI-led revenue deflation is likely to precede AI-driven growth. In other words, the near-term impact of productivity improvements and pricing pressure could be felt before new AI-driven spending fully offsets the decline.

This timing mismatch creates uncertainty in earnings visibility. If the deflationary impact emerges in the next few financial years while new AI-related opportunities scale up gradually, companies may face a period of subdued growth. Markets tend to react quickly when visibility weakens, even if the long-term outlook remains constructive.

Clients Are Exercising Caution

Another factor highlighted by Jefferies is the heavy technology spending undertaken by enterprises between 2021 and 2024. Annual incremental spending during this period rose to around 280 billion dollars, compared to roughly 130 billion dollars in the earlier phase.

Many enterprises are still evaluating the returns on that spending. At the same time, rapid advancements in AI have created hesitation around committing to large, long-term IT contracts that may need redesigning within a few years.

This combination of spending fatigue and technological uncertainty is slowing deal cycles. Slower decision-making directly affects revenue visibility for service providers, including Indian IT firms.

The Valuation Reset in Detail

The sustained decline in IT stocks is best understood as a valuation reset rather than an operational collapse. For many years, Indian IT companies traded at premium multiples because of their predictable earnings growth, strong return ratios, robust order books, and global diversification. Investors were willing to pay higher price-to-earnings multiples because they believed growth would remain steady and durable.

When long-term growth expectations shift from double-digit expansion to low single-digit CAGR, the premium multiple becomes harder to justify. Even if earnings remain stable in the near term, the market discounts future cash flows at a lower growth rate. This automatically reduces fair value estimates.

In addition, structural uncertainty around business models adds a risk premium. If up to 20 percent of existing revenue faces deflation risk, as estimated by Jefferies, investors demand a higher margin of safety. This often results in multiple compression before actual earnings reflect the slowdown.

The valuation reset is therefore not driven by panic, but by a reassessment of how durable margins, billing models, and growth trajectories will be in an AI-led environment. When the perceived certainty of long-term cash flows weakens, the price investors are willing to pay for those cash flows declines.

Why the Weakness Feels Persistent

The fall in IT stocks does not resemble a sharp crash followed by a quick rebound. Instead, it appears gradual and repeated because each new development reinforces the same concern. AI capabilities continue to improve. Brokerages continue to revise growth expectations. Global clients remain cautious in committing fresh spending.

Each of these factors adds incremental pressure, preventing a strong recovery.

Author's Take

The current weakness does not suggest that Indian IT companies are fundamentally weak. They remain profitable, well-capitalised, and globally competitive. However, the market is reassessing how resilient their traditional manpower-driven growth model will be in an AI-first world.

If AI impacts 20 percent of existing revenue and sector growth slows to 1.5 to 3 percent over the next five years, the premium valuations of the past may not return quickly.

The sector is entering a transition phase, moving from manpower-led billing toward AI-assisted delivery, automation-led execution, and potentially outcome-based pricing models. Companies that successfully reposition themselves to capture AI-driven opportunities may regain investor confidence.

Until there is greater clarity on how this transformation will play out, volatility and pressure in IT stocks are likely to continue.

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