A sharp sell-off in technology stocks pushed the Nifty IT index to its biggest monthly decline since the 2008 global financial crisis, as concerns about AI disruption rattled investor confidence.With Tuesday’s 6% decline, the Nifty IT index fell over 21% in February alone, marking its worst monthly decline since the 2008 global financial crisis, according to an ET report. The reason this time is not only macroeconomic weakness, but also concerns about the potential disruption of traditional IT services.Concern intensified after artificial intelligence startup Anthropic said its Claude tool could help simplify COBOL code, raising concerns about technology companies’ long-term revenue streams.
The announcement sent shockwaves through global technology stocks, with IBM shares falling 13% overnight – the company’s worst single-day sell-off in about 25 years.During the last trading session, IT stocks fell as much as 8%, with losses for Coforge, Persistent Systems and HCLTech, falling about 7-8%. Shares of Infosys, Tech Mahindra, Mphasis and Tata Consultancy Services fell by about 4% to 6%, while the Nifty IT index fell by 6%.
Post the correction, the Nifty IT index is now trading at an eight-year low compared to the Nifty 500 index, drawing the attention of contrarian investors looking for value opportunities.
Cheap reviews alone may not be enough
Market experts have warned investors against rushing into the sector despite falling valuations.“The sector is in a state of flux with growing concerns. If growth risks do not materialize, there is scope for meaningful returns. However, clarity on long-term growth is essential before it can become decisively positive.”
“In a sector facing disruption, a cheap valuation alone will not be enough,” S Narain, CEO and CIO of ICICI Prudential AMC, had told The Economic Times earlier.The sector’s weakness predates current AI concerns, said Alok Agarwal, head of quants and fund manager at Alchemy Capital Management, noting that earnings growth over the past three, five and 10 years has largely remained in the single digits or barely reached double digits.He said the poor performance reflects the commoditization of services, price pressures and slowing demand from major Western markets. Adding AI disruption to the top of these trends could dilute earnings visibility.He added that high dividend yields and attractive free cash flow yields may appear supportive but remain backward indicators. If growth weakens further, cash generation may come under pressure, making these returns less sustainable.
Until companies demonstrate clear strategies to move towards AI enablement or move up the value chain, the risk-reward balance may remain unfavorable even over four to five years.
Technical indicators point to further downside risks
Technical analysts said that market signals still favor caution.Anand James, chief market strategist at Geojit Investments, said oscillators had earlier turned into oversold territory with signs of positive divergence, but the latest collapse pushed the index below the February 13 reaction low at 31,422, with momentum indicators favoring further downside.
He identified 29,961 as the nearest support level, followed by 28,800 and 27,200 in case of deeper declines, while 30,300 intraday and 31,300 on a closing basis remain key reversal levels and 36,200 acts as major resistance.The index entered a clear bearish phase after breaking out of the head and shoulders pattern on the weekly chart, said Sachin Gupta, Vice President of Research at Choice Broking. A decline below the crucial 10-month low of 30,918 confirmed a structural trend reversal, while a breakout of the 61.8% Fibonacci retracement level and a negative crossover of the major moving averages – commonly referred to as a “death cross” – signaled that the strategy of buying on previous dips had turned into selling on the rise.It sees further decline towards the 29,300-28,700 region unless there is a strong global catalyst, especially stability in the Nasdaq, which leads to improving sentiment.The index has formed a pattern of lower highs and lower lows, indicating weak momentum, said Ajit Mishra, senior vice president at Religare Broking. Immediate support appears near 29,600, with a key support area around 26,300. Any bounce towards 33,000-34,000 could attract fresh selling pressure, and traders are advised to avoid new long positions and instead look for short selling opportunities on bounces.
More pain or opportunity ahead?
The valuation decline in IT stocks is clear, but uncertainty over AI-led disruption continues to cloud the outlook. If technological changes prove gradual, a sharp correction may eventually create long-term opportunities. However, if demand for traditional services weakens significantly, the decline may continue.For now, experts recommend a wait-and-watch strategy as investors look for clearer signs of growth stabilization and sector adjustment.(Disclaimer: Recommendations, opinions regarding stock market, other asset classes or personal finance management tips provided by experts are their own. These opinions do not represent the views of The Times Of India)
