Why IT Stocks are Rising

It's just a few days until Christmas, but it seems Santa has arrived early to D-Street.

The markets have soared to record heights, and certainly, investors are excited looking at the performance of their portfolios.

But, do you know where the actual Santa rally is happening?

Well, it is in the IT sector.

To understand better, let's break down the performance of IT stocks.

In a week, the share price of Coforge has shot up by 9% while Persistent Systems has offered a return of 9%. HCL Tech, too has seen a 6% boost, whereas TCS is up by 3.5%, and Infosys is showing off a 4% rise.

What's even more striking is that within the Nifty IT, all 10 contributors are gainers.

In the last five trading sessions alone, Nifty IT has outshone the broader market, delivering a return of 5.5%, outpacing modest 1.6% return offered by Nifty.

So, the question is, what's the secret sauce fuelling this rally in IT stocks?

Let's find out.

#1 US Fed's Decision

The primary reason behind the rally in IT index can be traced back to the outcome of the recent US Federal Reserve meeting. Since then, the Nifty IT index has rallied about 2,000 points.

This rally was triggered by the US Fed's announcement on Wednesday, 13 December 2023 to keep key interest rates unchanged for the third consecutive time.

What added fuel was the commentary from Fed Chair Mr. Jerome Powell, signalling the end of its monetary tightening cycle and suggesting the possibility of three rate cuts in 2024.

This news is positive for IT companies, as they generate a significant portion of their revenue from the United States.

You see, a rate hike can have ripple effects on employment, lending rates, and, can ultimately lead to the overall slowdown of the US economy. But, this time there is a possibility of a rate cut which is good news for the overall IT sector.

Moreover, the Fed chair, Mr. Jerome Powell also mentioned that inflation has cooled off significantly without hampering employment which is a good sign.

This dovish stance by the Fed has raised hopes among investors with expectations of a rebound in growth numbers for IT companies and the overall optimism is the driving force behind the ongoing rally in IT stocks.

#2 Sentiment of Nasdaq Composite

Nasdaq Composite is a tech-heavy index and the Indian IT and some IT enabled stocks are considered as a shadow of the Nasdaq index.

Due to the Federal Reserve's dovish comment, the tech stocks in the US are also surrounded by optimism. This positivity is boosting the sentiment back home.

Not just that, overall US market sentiment is positive. The Dow Jones Industrial Average (DIJA) has been on a continuous bullish rally which is also contributing to the overall bullishness of the Indian markets.

In the past five trading sessions, Nasdaq composite has rallied over 3.3%, whereas Nifty IT has rallied over 6%.

What's Next?

If you remember, in the quarter under review, most Top Indian IT companies reported soft revenue numbers due to the impact of macroeconomic uncertainties, which resulted in reduced discretionary spending in critical markets.

Also, during that time, the US Fed was committed on bringing down inflation to 2% and hence the outlook for IT companies was cloudy as further rate hikes could put pressure on the US economy.

In the September quarter, the largest IT company - Tata Consultancy Services reported a rise of 8.7% in consolidated net profit at Rs 113.4 billion (bn) as compared to Rs 104.3 bn during the same period last year.

Moreover, it also reported a decline in its US Dollar revenue for the first time in over three years which stood at US$ 7.2 bn.

Infosys, the second largest IT player reported a net profit of Rs 62.1 bn which is a 3.2% increase year on year (YoY). However, the company had to trim its revenue growth guidance for the full year at the upper end to 1% to 2.5%.

Wipro also reported a consolidated net profit of Rs 26.7 bn in the September quarter, compared to Rs 26.5 bn in the same quarter a year ago. The company's quarterly dollar revenue also fell 2.3% sequentially which marked the third straight decline for the Indian IT services firm.

Now, the recent rally has covered the underperformance of IT stocks in the last one year.

Stocks like TCS, Persistent Systems, Wipro, Coforge, LTI Mindtree and Tech Mahindra have hit their respective 52 week highs today, on 15 December 2023.

However, Infosys is the only stock from the IT index which is still trading at a discount to its all-time high of February 2023.

Going forward, a potential turnaround in the US economy due to rate cut is anticipated to translate into positive outcomes which can reflect in the growth figures of Indian IT stocks.

Conclusion

In conclusion, investors may find the recent surge in IT stocks as an early gift from the market Santa.

Yes, the combination of favourable global factors, particularly the US Fed's dovish stance, and a potential rebound in the US economy may bring cheer to IT investors.

However, investors should also exercise caution and must keep an eye on any unforeseen market shifts as it could impact the sustainability of this rally.

Happy Investing!

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