Bear Or Bubble? Why Tech Stocks Remain Expensive Despite Market Downturn

The Nifty IT index has entered a bear market, dropping more than 20% from the peak it touched on Dec. 13, 2024. Yet despite the selloff, most of the companies in the basket continue to command valuations above the sector’s own multiple.

Names such as Infosys, HCL Technologies and Wipro have logged declines between 20% and 25%.

IT stocks have been under pressure this year as global headwinds piled up. Concerns over US tariff policies under Donald Trump and his push against outsourcing software services have dampened investor sentiment and earnings across several companies have disappointed in recent quarters, reinforcing the view that demand recovery may take longer.

The tightening of H-1B visa rules, including the new $100,000 fee, has added to the strain, with TCS emerging as the largest recipient of such visas last year.

Analysts point to slowing large-deal wins, weak client spending in key markets and a cautious growth outlook from management commentary.

"Negative sentiment and a perception of unpredictability surrounding US policies are influencing current valuations," said Globe Capital Market AVP of Equity Research Vipin Kumar told NDTV Profit.

Despite the IT index's slump, the current price-to-earnings ratios for six of the 10 constituents stand higher than the Nifty IT average of 25.48, according to Bloomberg data. Stocks such as Coforge and Persistent Systems trade at more than double the index level.

“Premium valuations in frontline names like TCS and Infosys aren’t purely about near-term earnings,” Kumar said. “They reflect balance sheet and cash flows strength.”

The valuations, however, are lower than they were in December 2024, and all companies except Mphasis now trade below their five-year averages, Bloomberg data showed.

Kumar noted that many large-cap IT firms are already priced below their long-term median multiples. “Given FY26 demand, outlook remains muted but investment with a longer time horizon, beyond a year or so, is recommended to benefit from the sector’s underlying strength and potential recovery,” he said.

Forward estimates from Bloomberg show P/E ratios are expected to ease further. Possible re-rating triggers include policy clarity and stronger deal momentum.

“Any easing of H-1B visa issue, positive outcome of trade negotiations with US along with improved geopolitical situation would boost investor sentiment,” said Kumar. “Any visible uptick in large-deals or cloud/AI-led transformation projects would also re-rate the space.”

He also warned of risks. “If fears of a US recession resurface or an increase in deal cancellations emerges, we could see a further decrease in valuations, particularly for mid-tier companies,” he said.

Relative strength index readings show only Tata Consultancy Services has entered oversold territory, with a score of 30. Most other IT stocks, despite heavy declines, remain above the threshold.