- Indian IT stocks face pressure from $10 billion FPI outflows since October 2024, says Jefferies
- Alphabet shares dropped 12.6% after Q3 earnings missed expectations, erasing $500 billion market value
- Alphabet’s AI spending and cash flow concerns add uncertainty for global tech and Indian IT firms
Indian IT stocks are likely to remain in focus on Friday as investors digest two developments that could weigh on sentiment towards the sector, including sustained foreign investor selling and a historic sell-off in Alphabet, Google's parent company, following its third-quarter earnings (Q3) disappointment.
Foreign portfolio investors (FPIs) have pulled nearly $10 billion from India's information technology sector since October 2024, making it one of the worst-hit segments in the prolonged foreign selling spree, according to Jefferies. Adding to the concerns, Alphabet shares plunged nearly 12.6% on Thursday, wiping out more than $500 billion in market capitalisation in their worst single-day decline on record.
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The earnings disappointment also weighed on broader US markets overnight, with the Nasdaq Composite emerging as the worst performer among the three major Wall Street indices. The tech-heavy index declined 1.38%, compared with a 0.30% fall in the S&P 500 and a 0.25% decline in the Dow Jones Industrial Average, as Alphabet's weaker-than-expected Q3 results added to pressure on technology stocks.
The sharp sell-off in Alphabet has revived concerns over the global technology spending cycle, the monetisation of artificial intelligence (AI) investments and the outlook for technology companies. For Indian IT services firms, the development could add another layer of uncertainty at a time when foreign investors are already reducing their exposure to the sector.
Jefferies has maintained a cautious stance on Indian IT stocks, assigning a 'Hold' rating to Infosys and an 'Underperform' rating to Tata Consultancy Services (TCS).
READ | Jefferies Cautious On IT: TCS Rated Underperform, Infosys Hold After $10 Billion FPI Outflow
However, the brokerage believes a potential reduction in India's long-term capital gains (LTCG) tax could improve foreign investor sentiment, potentially supporting equity markets and the rupee. No decision on such a tax change has been announced by the government.
Indian IT Stocks: Why Have FPIs Pulled $10 Billion From The Sector?
Indian IT has been among the biggest casualties of foreign portfolio investor selling since October 2024, with the sector witnessing net outflows of around $10 billion, according to Jefferies.
Financials have recorded the highest net FPI outflows at $16 billion, while IT and consumer staples have each seen approximately $10 billion withdrawn over the same period.
Jefferies said sectors that have faced heavy foreign selling could benefit if FPI flows reverse. Among these oversold sectors, the brokerage prefers banks. It also favours energy stocks, including Reliance Industries, utilities and real estate.
The brokerage continues to prefer large-cap stocks over mid-caps, citing relatively attractive valuations and the potential for foreign flows to return.
Google's $500 Billion Stock Rout: What Happened?
Alphabet shares witnessed a historic sell-off on Thursday, October 29, after the technology giant reported third-quarter earnings and revenue that fell short of Wall Street expectations.
READ | Alphabet Shares Extend Decline To 13.7%, Biggest Drop On Record
Class A shares (GOOGL) plunged 12.64% to close at $283.82, while Class C shares (GOOG) declined 12.29% to settle at $282.32. The sell-off erased more than $500 billion in the company's market value.
This came after Alphabet reported a 25% year-on-year decline in net profit to $26.17 billion for the July-September quarter, compared with $34.98 billion in the corresponding period last year.
Revenue increased 25% to $127.58 billion but missed analysts' estimates of $127.97 billion, according to FactSet data. Adjusted earnings stood at $2.67 per share, below the Street's expectations of around $3.02, according to LSEG data.
One of the biggest concerns for investors was the company's cash flow and rising AI infrastructure expenditure.
Alphabet reported negative free cash flow of $9.07 billion in the September quarter, against expectations of a near-breakeven performance. Capital expenditure surged to $51.4 billion, more than double the year-ago level, as the company continued to invest heavily in data centres, computing capacity and AI infrastructure.
The company retained its 2026 capital expenditure guidance of $195 billion to $205 billion. However, CFO Anat Ashkenazi indicated that spending would increase significantly in 2027, adding to concerns over the time required for AI investments to generate returns.
Alphabet's core advertising business also showed signs of moderating growth. Google Search and other advertising revenue increased 12% to $63.35 billion, compared with 17% growth in the previous quarter.
YouTube advertising revenue rose 9% to $11.21 billion. In contrast, Google Cloud delivered strong growth, with revenue more than doubling to $30.71 billion from $15.16 billion a year earlier. Its order backlog reached $561 billion.
Alphabet CEO Sundar Pichai said the company had crossed an annualised revenue run rate of $500 billion, while its Gemini AI application had surpassed one billion users.
Despite the strong performance in cloud and AI adoption, investors remained concerned about the scale of spending and its impact on cash generation.
Why Google's Earnings Matter For Indian IT Stocks
Alphabet's earnings disappointment comes at a time when global technology companies are ramping up investments in AI infrastructure while investors increasingly demand clarity on returns from these expenditures.
For Indian IT services companies, the key monitorables include global technology spending, enterprise demand, discretionary IT budgets and the pace of AI-led transformation deals.
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A sharp correction in a global technology heavyweight such as Alphabet could also weigh on sentiment towards technology stocks more broadly. However, Google's advertising business and AI infrastructure investments are different from the IT services business models of companies such as TCS, Infosys, HCLTech and Wipro. Therefore, the sell-off should not automatically be interpreted as a direct indicator of weaker demand for Indian IT services.
The main question, however, for Indian IT investors is whether global technology spending remains resilient and translates into higher outsourcing, cloud migration and AI implementation opportunities for Indian service providers.
Jefferies Sees Scope For Foreign Flows To Reverse: What Could Trigger A Recovery?
While foreign selling has remained a major overhang for Indian equities, Jefferies believes changes to India's equity taxation framework could improve the country's attractiveness to overseas investors.
Market speculation about a possible reduction in LTCG tax has gathered pace, although the government has not announced any decision.
Jefferies said potential measures could include a reduction in LTCG tax, changes to taxation for foreign investors in debt and relief on GST applicable to brokerage services.
The brokerage's analysis of 70 large emerging-market funds, with combined assets under management of $380 billion, showed that India was underweight by 0.3 percentage points. This compares with its 10-year average overweight position of 2.2 percentage points.
Since April 2025, equity-market-related outflows, including those from FPIs, foreign promoters and foreign private equity investors, have totalled $110 billion, according to Jefferies.
A more favourable tax regime could help reverse some of these flows, supporting domestic equities and the rupee.
However, the potential fiscal implications of any tax relief remain a key consideration for the government.
Which Stocks Does Jefferies Prefer?
Despite its cautious stance on IT, Jefferies sees opportunities in sectors that have faced significant foreign selling.
The brokerage prefers banks within the oversold segments, alongside energy, utilities and real estate. Reliance Industries is among its preferred energy exposures.
It also favours large-cap stocks over mid-caps. Large-caps have underperformed mid-caps by five percentage points in 2026 and are trading at a 23% valuation discount to their 10-year average, compared with a historical discount of 20%.
Jefferies believes the narrowing earnings-growth gap between large-cap and mid-cap companies could further improve the relative appeal of large-cap stocks.
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