Amid global economic slowdown, IT (Information Technology) sector registered quite slow growth in the calendar year 2024. Nontheless, Nifty IT as a whole delivered decent return of nearly 23 per cent year-to-date as against Nifty's return of just over 9 per cent during the same period.

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Rate cuts boost IT sector's prospects
Primarily after the US Federal Bank has resorted to rate cuts amid better economic landscape, IT companies in India enjoyed a better position. Pertinently the Fed's monetary easing cycle or a lower interest rate environment implying lower operating costs and greater profits gives a push to American corporation, propelling their tech-spending appetite.  This in turn positively impacts the demand for Indian IT services providers.

In today's trading session, IT stocks witnessed heightened volatility, with sector heavyweight TCS leading the downward trajectory despite a positive market opening. The weakness in IT stocks can be attributed to multiple headwinds, including a strengthening dollar and elevated US bond yields, which traditionally impact the sector's earnings outlook.

IT sector outlook for 2025

G Chokkalingam- Founder, Equinomics is not so optimistic on large IT Stocks in 2025. Possible protectionism measures from the new US President, delay in rate cut and continued poor single digit growth in dollar terms would act as a dragger at least in first half of CY2025, he added.

Poor growth prospects of IT industry may induce consolidation in the industry. Hence he recommends IT companies like Cyient. 

Deepak Jasani, Head of Retail Research, HDFC Securities on the contrary held that the IT sector looks set for recovery after two years of sluggish growth, driven by expectations of President Trump's policies and sustained rate cuts. Indian IT companies have significant exposure to the US market. The rate cut cycle is positive for the BFSI space in the US which is the biggest buyer of Indian IT services. 

A cut in corporate tax in the US could lead the US companies to use part of that savings into IT upgradation. This could open up new avenues of business for Indian IT service companies, added Jasani.

Jasani further noted that the domestic earnings season outlook for Q3FY25 is not so disappointing for IT and there is expected a stable single-digit earnings growth. 

Deepak Ramaraju, Senior Fund Manager, Shriram AMC stated that IT, which has already recovered from its lows after rate cuts, may do well in 2025 as discretionary spending picks up, provided Trump does not impose any surprise tariffs.

Atul Parakh, CEO of Bigul said, "The sector's performance will likely be closely tied to global macro factors, particularly any signals regarding potential rate cuts." 

The muted post-Christmas trading activity suggests investors are adopting a wait-and-watch approach, balancing the sector's traditionally strong fundamentals against current market uncertainties and the upcoming Union budget implications, he added.

The rupee's descent to historic lows has added another layer of complexity to the sector's performance, as currency depreciation typically benefits IT companies' export earnings but may raise concerns about broader economic stability, noted Atul Parakh, CEO of Bigul. 

Jasani advises that despite the sector's current rich valuation multiples, investors should focus on selectively identifying large and midcap IT stocks with strong fundamentals and a proven potential for robust earnings growth and profitability in the near future. 

Investors are hence advised to adopt a 'buy on dips' strategy, taking advantage of temporary price corrections to accumulate positions in these promising stocks.

What do techicals suggest for IT stocks?

Jigar S. Patel, Sr. Manager- Equity Research said, "At this point, Nifty IT has formed a negative divergence on the weekly MACD, signalling weakening bullish momentum despite recent gains. A negative divergence occurs when the price makes higher highs while the indicator forms lower highs, suggesting a potential reversal or correction"

Given this setup, we anticipate a significant correction of 4000-5000 points in the first half of 2025. This expectation aligns with the broader technical structure, where momentum oscillators are losing strength and market sentiment appears to be shifting, he added.

Patel pointed out that traders and investors should remain cautious, especially near resistance levels, and focus on risk management. A strategic approach would involve waiting for clear support zones to emerge before re-entering long positions in the IT sector.