AI Bubble, Fed Pause Fears, Weak Cloud Momentum: What's Weighing On IT Stocks?

After a strong start to the week followed by two straight days of declines, the Nifty IT index is again testing investor patience. The sector had shown signs of life last week with a sharp 5% rebound, its best move in months, but the recovery was quick to fade. For an index still 17–18% down year-to-date, the volatility raises one central question for markets today:

The immediate pressure comes from overseas. The Nasdaq has softened again, weighed down by rising concerns that the AI trade may be overheating. Some fund managers believe valuations across major AI names have run far ahead of fundamentals, leading to fears of a possible AI bubble forming at the top-end of the tech market.

Adding to the strain, Google's weaker AI and cloud momentum has amplified doubts about near-term monetisation in generative AI, an area where Indian IT earns a rising share of deal wins.

With Google’s underperformance dragging tech sentiment lower, Indian IT exporters have been caught in the spillover.

Another layer of uncertainty stems from expectations around US Federal Reserve rate cuts. A rate-cut cycle normally boosts tech spending, but the market now worries the Fed may cut later or slower than earlier hoped.

Sentiment are choppy, especially for a sector closely tied to global growth cycles.

Despite the latest slide, the earlier rebound wasn’t meaningless.

IT stocks had fallen so sharply that valuations dipped well below key technical averages, inviting value buyers back into the market. This attracted accumulation in Tier-1 names, especially those trading at five-year valuation discounts.

Sentiment also improved after US President Donald Trump’s unexpectedly softer tone on H-1B visas, reducing worries about US immigration tightening — an issue that directly affects Indian delivery teams.

The easing of US government shutdown risks also mattered. Lower political uncertainty helped revive confidence in the outlook for FY26 deal flows.

Finally, the weaker rupee added an earnings cushion, giving exporters margin support at a time of modest revenue growth.

Under the surface, the industry is undergoing a gradual but significant shift.

Most top-tier companies managed to beat Street expectations, not because demand is booming, but because cost control has been exceptionally tight. Firms have trimmed discretionary expenses, frozen non-critical hiring, and sharpened delivery models to protect margins.

Yet, the challenge remains: revenue growth is still modest. Clients, especially in BFSI and telecom, are cautious with discretionary spends. Even though conversations around AI are increasing, actual deal sizes remain moderate.

However, something important has changed, AI is no longer a hype-driven buzzword. It has moved into mainstream execution, with enterprises shifting from pilots to measurable use cases. That shift helps create a more stable medium-term outlook.

Companies are also limiting onsite hiring, reducing visa-linked costs and managing talent deployment more efficiently.

The current mood is a mix of fear and hope.

Fear, on the back of Nasdaq’s weakness and AI bubble worries, may continue to pressure tech stocks. There is fear also because global clients have not yet fully revived their discretionary spending.

But hope is equally strong. A Fed cutting cycle typically lifts tech budgets. AI-led spending is rising, even if gradually. And valuations across Indian IT are undeniably attractive compared to historical norms.

This emotional tug-of-war is exactly why the IT index is struggling to hold gains despite improving signals beneath the surface.

The sector doesn't appear to be in free fall, and the worst of the correction appears behind us. The earlier bounce shows that investors are willing to re-enter, especially at lower valuations. But a real, lasting comeback needs a clear revival in global demand, something yet to be witnessed

For now, IT is in an early repair phase, not a full-scale recovery.