Rally in IT stocks will continue if Q1 earnings of tech firms are good

Globally, technology stocks have been touching higher levels in recent days. Nasdaq, which is a technology-heavy index, was up one per cent on Monday and closed at a record high again. After the recent quarterly results, share prices of technology companies like Apple, Microsoft, Meta, Nvidia and Oracle, among others, have seen a significant rally. This was more pronounced in the semiconductor firm, Nvidia, whose rally has been spectacular. Investors are showing increased interest in global technology stocks as these companies started showing higher revenue coming from AI.

It is giving confidence to investors that all investments that companies have incurred in recent years, have started to pay dividends. Also, the commentary from the management indicates that they expect the AI contribution to increase in the coming quarters. Apart from investment returns from AI, technology companies are now betting on a probable interest rate cut by the US Federal Reserve. Recent inflation data has raised hopes that the US central bank may consider reducing interest rate quite earlier than anticipated.

Against this backdrop, Indian IT stocks have started taking cues from the global markets. The Nifty IT index has jumped around 5-7 per cent in the last two trading weeks. Both large cap and mid cap stocks have participated in the uptrend. Most investors have taken the Accenture’s management commentary as a sign that things are stabilising. Though there is no good news coming in as far as discretionary spending is concerned, the ‘no bad news is good news’ syndrome seems to be at play. Many brokerage firms have come out with reports predicting that the demand slowdown has bottomed out and Q4 of FY24 might be the end of worst quarters in recent years.

However, this theory will only be validated only after Indian IT companies come up with their Q1 earnings reports. The IT earnings will begin from next week onwards and investors will be keen to see whether any uptick is seen in the discretionary spending space. Similarly, revenue conversion from large deals will be another parameter, which will show that clients are now spending up technology projects. If headcount goes up after six quarters of consecutive fall, this can also be taken as a lead indicator.

This is given that IT firms usually man their benches with required human resources if they sense that projects are on their way. Moreover, after all the debates over Generative AI, market wants to see concrete results. So, investors want to understand whether all the talks about GenAI are translating into revenues or not.

As Accenture has started giving absolute revenue numbers from GenAI, Indian investors will also be keen to see such disclosures by other Indian IT firms. As far as engineering services companies are concerned, the market will see whether growth is cooling off or is being sustained because most ER&D stocks are trading at a premium at this point of time. So, sustaining a rally in the IT index requires real reflection in the P&L account. Any disappointment in these fronts may not be good for the IT sector in general and IT stocks in particular.