IT stock rally to continue if tech companies post good Q1 earnings

Globally, technology stocks have been trading higher in recent days. The Nasdaq, which is a technology index, rose one percent on Monday and closed at a record high again. After the latest quarterly results, tech stocks like Apple, Microsoft, Meta, Nvidia and Oracle, among others, have seen significant gains. This was more evident in semiconductor company Nvidia, which has been growing spectacularly. Investors are showing increased interest in global technology stocks as these companies have started to show higher revenues coming from AI.

This gives investors confidence that all the investments that the companies have made in recent years have started paying dividends. Moreover, the management commentary indicates that they expect AI contributions to increase in the coming quarters. In addition to AI investment returns, tech companies are now betting on a likely interest rate cut by the US Federal Reserve. Recent inflation data has raised hopes that the US central bank may consider cutting interest rates much sooner than expected.

Against this backdrop, Indian IT stocks have started taking cues from global markets. The Nifty IT index has risen around 5-7 per cent in the last two trading weeks. Both large and mid-cap stocks have been part of the rally. Most investors have taken the Accenture management comment as a sign that things are stabilising. While there is no good news on the discretionary spend front, the ‘no bad news is good news’ syndrome seems to be at play. Several brokerage firms have issued reports predicting that the demand slowdown has bottomed out and Q4 FY24 could be the end of the worst quarters in recent years.

However, this theory will be confirmed only after Indian IT companies report their Q1 earnings. IT earnings will start from next week and investors will be eager to see if there is a pick-up in the discretionary spending space. Similarly, revenue conversion from large deals will be another parameter that will show that customers are now spending money on technology projects. If the headcount picks up after six straight quarters of decline, that can also be considered a leading indicator.

This is because IT companies usually fill their positions with the necessary human resources if they feel that projects are on the way. Moreover, after all the debates about Generative AI, the market wants to see concrete results. So, investors want to understand whether all the talk about GenAI translates into revenues or not.

Since Accenture has started disclosing absolute revenue numbers from GenAI, Indian investors will also be interested in such disclosures from other Indian IT companies. As for engineering services companies, the market will see whether the growth is cooling down or sustained as most ER&D stocks are trading at a premium at the moment. So, for the IT index to sustain its rally, it needs to be reflected in the P&L statement in a tangible way. Any disappointment on these fronts may not be good for the IT sector in general and IT stocks in particular.