Until recently, I had never heard of Anthropic. I probably would have thought it to be some name of a medicine or some sort of malady of personality! Oh, him, don't bother, he is anthropic! You know, that sort of thing.
But then this company comes along and a day or two ago, it releases some new version of something, see here, too, I am betraying my gross lack of knowledge or pretensions of expertise of anything related to New Tech. And this leads to a veritable collapse of many tech leaders in a single day! What they haven't made in a year was probably lost in a day. The main names out of the US were trounced and the local leaders too went for a toss.
What does this say about the tech marketplace? That it is very vulnerable to new innovations. And, the bigger problem is, this place is full of innovations every single day of the year! Has this surprise by what Anthropic did forever brought in a sense of uncertainty into Tech stocks the world over? I would certainly think so.
A couple of months ago, I did one small piece of comparative study of the leading stocks in the IT sector, where it emerged that all leaders were struggling to remain in trends and enforce them. The only stock I pointed out- and that too with caveats — was Coforge. There too, quarterly results were damp, leading to renewed declines in the stock.
But what seems to have happened now — the introduction of some AI tool plug-ins for its Claude Cowork agent last week that can automate tasks across legal, sales, marketing and data analysis — is being called a ‘structural shift', moving AI from its hitherto understood role of augmenting services to one of a more central role, decimating time consuming platforms delivering complex SAP migrations (that require years of human effort).
This can create near-term anxiety for service-heavy IT models built on long execution cycles and linear headcount growth. It will also crush billable hours and reduce margins for Indian tech companies and thereby threaten the entry-level talent pool.
The IT stocks, already under pressure, had kept the Cnx IT in check since the top in Dec 2024, and this seems set to continue.
Chart reveals that, ever since the high, rallies have been weak, unable to extend beyond the 50% pullback (classical limit of bear rallies) and the lower panel in the chart shows limited momentum during the rallies. Now a trendline support exists but the news is large enough to pose a big threat of a break of this trendline.
This would prove to be a big disappointment for traders and investors as most had built up hopes and expectations after recent spate of results and commentary were seen as ‘not bad.' But with this news and the pummelling that the Nasdaq is taking with all round cracks in Tech stocks, there is a likelihood of valuation reassessment for sector. Average PE across the sector is@25x but there are many stocks that trade considerably higher than the average. If this happens, then the pace of decline may increase.
Barring HCL Tech the other three leaders have reacted sharply compared to the IT index, with TCS leading the fall. Chart 2 shows this.
When compared similarly, the second string of IT majors are still seen doing better. Chart 3 shows this but they have all reacted as well.
It is evident that the market is unhappy about the prospects of the leader stocks and expect more declines in them (except HCL Tech) and this can be taken note of by traders, for creating short positions. Others may consider creating Pair trades between large and mid-sized IT stocks as hedge trades. One thing is for certain over the near term — fresh big money flow towards the sector is not going to happen and that is going to cap any rally here for now. This can be comforting evidence for Option traders who may look to trade short calls.
Even though an FII brokerage has come out with a report that the damage on Indian IT may be limited, I feel the news, being structural in nature, will extend beyond the outlook for the coming year or so and push IT stocks into a non performing sector for the coming months. This is of greater relevance to the small investor and trader.
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