Discretionary spending pressures to persist in IT; demand scenario to improve in 2025-26, says Emkay

Emkay Global suggests that an interest rate cut could potentially trigger clients to reinitiate their spending cycles and increase discretionary spending.

Pressures on discretionary spending are likely to persist in the near term amid a weak macro environment, according to Emkay Global's analysis of Q4 FY24 results from 26 global information technology (IT) companies. While some positive signals are emerging in select geographies and verticals, the overall environment remains soft. Hyperscalers and SaaS-based players have experienced stronger demand driven by cloud services.

Emkay Global suggests that an interest rate cut could potentially trigger clients to reinitiate their spending cycles and increase discretionary spending. If rate-cut expectations materialize, earnings downgrades could bottom out by the first half of FY25. Recent actions by the European Central Bank (ECB) and the Bank of Canada indicate a trend towards rate reductions.

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The brokerage firm noted that the start of 2024 has not seen any improvement in discretionary spending, mirroring the trends of the second half of 2023. The BFSI and communications verticals remain weak, while manufacturing and E&U show resilience. Both North America and Europe exhibit signs of incremental weakness.

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Emkay Global highlighted that commentary from both global and Indian companies is similar, reflecting near-term weakness. Uncertainty around inflation continues to affect client decision-making and discretionary spending. According to Emkay, the demand scenario could recover in 2025-2026.

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