When Will IT Stocks Bounce? JP Morgan Answers

Indian IT stocks have taken a hit in 2024, and JP Morgan believes the pain might not be over yet—especially with fears of a US recession and the impact of new tariffs. The Nifty IT index has already corrected 20% year-to-date, while the broader Nifty is down just 2%. A big part of this fall is due to "PE derating in anticipation of US tariffs."

Tariffs announced overnight were "at the hawkish end of previous expectations," the report said. This triggered a sharp sell-off in IT stocks, with Nifty IT falling 4% in a single day, while the main Nifty index remained flat. Large-cap IT names like TCS, Infosys, and HCL Technologies were down 3-4%, and midcaps like Coforge, Persistent Systems, and KPIT Technologies were hit harder, dropping 8-10%.

Is FY26 a Washout Year for IT?

JP Morgan is turning cautious about the upcoming financial year. "With a rising risk of US recession and uncertain decision-making, we think chances of FY26 being a complete washout are rising," the report noted. The brokerage assumes 0% revenue growth in FY26 for top IT companies like TCS, Infosys, and HCL Technologies, with no margin expansion. This means no earnings growth, compared to market expectations of 8-12% growth.

In this bear case scenario, they expect FY27 earnings for these companies to be cut by 9-11%.

When Will These Stocks Bottom Out?

JP Morgan uses dividend yields and free cash flow (FCF) yields to assess where large-cap IT stocks might find a bottom. For example:

TCS has previously bottomed out at a 3.9% dividend yield and 5.2% FCF yield. It is currently at 3.4% and 3.6%, suggesting it is getting close to its floor.

Infosys has bottomed at 4.6% div yield and 6.3% FCF yield, but is now at 3.8% and 4%.

HCL Technologies historically bottoms at a 5% dividend yield. It currently offers 4%.

JP Morgan concludes that “these names are 6-14% away from bottom prices,” which could mean a buying opportunity is near.

Midcaps Could Fall Further

For midcap IT stocks like Coforge and Persistent, JP Morgan uses a different method. They expect both companies to end FY25 with decent momentum—11.6% and 6.6% exit growth respectively. Even in a bear case, where growth slows to 1% CQGR (compound quarterly growth rate) through FY26, they still forecast 15% and 10% revenue growth.

Also Read: Tariff Tensions Explained: Why Did Donald Trump Take A U-Turn?

However, they assume “no margin expansion,” which would still lead to 10-15% cuts in FY27 earnings. JP Morgan assigns a PEG ratio of 1.5x, leading to a 27x PE for Coforge and 30x PE for Persistent. According to the report, these stocks could fall 13% and 25% more before bottoming out.

So When Should You Buy?

JP Morgan advises caution around earnings season. “We don’t recommend buying any stock into earnings,” they say, as they expect conservative guidance from companies like TCS and Infosys, which could push prices lower.

They believe large-cap IT stocks will become attractive after earnings announcements, especially if prices correct further. As for midcaps, the report states: “We would tactically buy closer to earnings as we expect multiples to be sensitive to negative comments from TCS/Infy earnings.”

Still, they remain selective: “We would still prefer to be lighter in IT positioning, so remain OW (overweight) Infy and the growth midcaps.”

Notably, the U.S. accounts for more than half of India's $190 billion software exports, making the sector sensitive to shifts in spending confidence among businesses in the world's largest economy.