JPMorgan revises IT sector outlook to ‘neutral’, leading to a surge in market

Hyderabad: In a notable market move, JPMorgan, a leading brokerage firm, has altered its stance on the information technology sector, pivoting from a previously pessimistic view to a more balanced 'neutral' position. This shift is prompted by forecasts of a potential change in the US Federal Reserve's approach toward rate adjustments, combined with a promising base.

Consequently, the brokerage has upgraded ratings for prominent players in the IT domain, such as Infosys and L&T Technology Services, to 'overweight.' Moreover, it has raised ratings for TCS, HCLTech, Mphasis, and Persistent Systems to 'neutral,' marking a departure from their earlier 'underweight' status.

Following these upgrades, most IT company shares experienced a modest upswing on January 4, contributing to a roughly 1 percent rise in the Nifty IT index.

The company bases these alterations on expectations of a shift from rate cuts to cost-saving measures, pro-cyclicality strategies, short-term preparations for generative artificial intelligence (Gen AI), and the significantly low base of 2023, factors driving these numerous upgrades.

Despite the bullish trend in the market throughout 2023, the IT sector trailed behind, primarily due to a challenging macro environment. Prolonged deal conversions and reduced IT spending amid business downsizing were major contributors to this underperformance.

However, optimism about the potential success of the U.S. central bank in orchestrating a smooth economic slowdown, coupled with indications of an earlier-than-expected initiation of the interest rate reduction cycle, suggests a more favourable macroeconomic landscape for the sector.

Conversely, brokerage firm Kotak Institutional Equities foresees a decline in year-on-year (YoY) and quarter-to-quarter (QoQ) revenue in the December quarter for IT giants Infosys, Wipro, and Tech Mahindra.

"We anticipate a weak quarter for IT Services companies due to furloughs, weak discretionary spending, and project cuts affecting performance," Kotak stated in its report, projecting a YoY and QoQ revenue decline for three of the big five IT services companies in December 2023E.

According to Kotak, Infosys might experience a 1.9% YoY and 2.2% QoQ decline, Wipro a 6.9% YoY and 2.7% QoQ, Tech Mahindra an 8.8% YoY and 1% QoQ, and Mphasis a 9.4% YoY and 0.5% QoQ.

Nevertheless, other analysts anticipate that positive catalysts will be reflected in the financial results of major IT companies toward the latter part of FY24 or the beginning of FY25.

With optimism rising for a recovery, analysts suggest that investors eyeing entry into the market with a long-term view should consider directing their focus toward IT stocks. IT entity valuation appears more reasonable compared to other stocks that witnessed substantial rallies in 2023.