The entire IT pack is under a tariff-induced selloff, fearing that trade barriers may fuel US inflation, stall recovery in discretionary spend, and potentially tip the American economy into a recession. Leading IT shares like TCS and Infosys are sharply lower, along with midcap names, on worries that US clients may cut back on tech spend, thus affecting Indian IT's revenue growth.
Profit Squeeze if US Tech Spend Stalls?
Market expert Sunil Subramaniam argues that the downturn in IT stocks is being driven by more than just broad recession fears. In an interview with Moneycontrol, Subramaniam highlighted US President Trump's warning to American companies against passing on tariff costs to consumers, putting significant pressure on corporations that rely on imported raw material and semi-finished goods. With profit margins at risk, US companies may opt to cut costs elsewhere - potentially delaying their IT spending, Subramaniam has pointed out.
Read More: Infosys, TCS weigh on Sensex as IT extends selloff on fears of slowing client spend
“The real concern is not just the broader US recession but the impact on corporate earnings in the US. If American firms see their profits shrink because they cannot pass on tariff-related costs, they might push IT expenditures to the back burner,” Sunil Subramaniam said.
Interest Rate Cuts and Currency Impact
Another factor weighing on IT stocks is the anticipated rate cut by the US Federal Reserve. Sunil Subramaniam said that the probability of a Fed rate cut has now increased to 70%, a move that could weaken dollar, which in turn affects Indian IT companies' earnings.
“In the past, a stronger dollar and a weaker rupee acted as tailwinds for Indian IT companies, boosting their earnings in rupee terms. However, with the dollar likely to weaken, this advantage is fading,” he added.
Relief for IT Services but Uncertainty Remains
While tariffs on services - a key concern for Indian IT companies - have not been introduced, Sunil Subramaniam is advising investors to wait and watch how US corporations respond to new trade realities before making any investment decision.
“There was a fear that tariffs might be imposed on services, but that hasn’t happened. This is a positive sign. However, we still need to see how American firms will navigate this situation—whether they absorb costs or pass them on in some other way,” Sunil added.
Earnings Season Holds Key
With earnings season around the corner, Sunil Subramaniam has advised on monitoring IT companies’ guidance and client spending trends. “The real clarity will come from IT firms themselves. Their earnings reports and analyst calls will give us a better idea of how their clients in the US are responding to the economic situation. Until then, it’s best to adopt a wait-and-watch approach,” Subramaniam said.
While there are no immediate tariff threats on services, the combined impact of US recession fears, shrinking corporate margins, and potential delays in IT spend signals that Indian IT may face short-term headwinds, prompting Sunil Subramaniam to suggest adopting a wait-and-watch strategy on IT stocks.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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