NIFTY IT gains the most in two years; surges 12% in July; Is IT sector finally bottoming out?

IT stocks are buzzing in Monday’s trade as investors turn cautiously optimistic on the beaten-down sector after Q1FY27 earnings show steady growth across the board. Shares of key large-cap IT stocks like OFSS (+3.9%), Infosys (+3.6%), Coforge (+2.6%), LTM (+2.4%), Mphasis (2.2%) and TCS (+2.2%) are among the top gainers for Monday. Looking at the current scenario around IT stocks in particular, the benchmark is on the verge of delivering one of the best monthly gains in a period of nearly 2 years. The NIFTY IT index has gained 12.2% in July, the best monthly gain since July 2024.

Undervalued and underperformed

The NIFTY IT index is among the top losers in 2026 on a YTD basis with over -22% returns. The index has underperformed major sectoral peers and against the tide of global tech stocks, which have been leading the rally elsewhere. The traditional software consulting model came under question after Artificial Intelligence made enormous breakthroughs in the computing space, threatening existing IT companies. Consequently, IT companies witnessed sluggish growth in deal wins, impacting earnings.

However, as tailwinds start to emerge in the IT sector, with the resurgence of hiring trends, massive upskilling drives and improved deal wins in the AI space, the sector shows signs of bottoming out, making it highly undervalued compared to peers.

AI push

The global software and consulting industry underwent a major shift and adopted AI across service verticals. In Q1FY27, the majority of the IT companies have shown concrete developments in AI and are offering AI services at the enterprise level. TCS’s AI segment revenue grew 13.6% sequentially, to hit an annual revenue rate of $2.6 billion for FY27. Infosys AI-led services contributed 8.2% of the total revenue for Q1FY27, up 5.5% from Q3FY26. HCL Technologies’ AI-led services revenue jumped 62% YoY to $171 million, and Mphasis’s 63% of the new-deal wins came from the AI-led services segment.

This underscores that Indian IT companies have shifted AI from proof of concept to a revenue-generating engine, providing an opportunity for rerating in IT stocks.

Global software stocks surge

The global software and consulting majors like Accenture Plc, Cognizant Technology Solutions, and Salesforce have witnessed a similar trend in July as their shares soared nearly 20% on a MTD basis. The recently announced results from software companies like ServiceNow show encouraging signs for the sector. The company’s Q2 revenue jumped 24.5% to $3.99 billion, beating the street estimates. Additionally, the company raised its full-year subscription revenue guidance, reflecting improving demand for enterprise-level AI computing services.

Valuations

Along with favourable sectoral tailwinds, valuations remain a major positive trigger for investors. The benchmark NIFTY IT index is trading at 18.3x price-to-earnings, significantly below the five-year median of 27x. Similarly, all the constituents of the NIFTY IT index also trade with similar discounts to their long-term averages. The discount to historical valuations displays major undervalued opportunities for long-term investors who intend to buy top companies in the economy at fair valuations.

Key risks

Despite the sharp rise in share prices this month, global brokerages continued to maintain a cautious call on IT stocks. Major global brokerages like Morgan Stanley, JP Morgan, Jefferies, Goldman Sachs, Citi and others have maintained the status quo on their stance on IT stocks as the global economy continues to go through the aftermath of turmoil in the Middle East. The change in volatility in energy prices could lead to sticky inflation and elevated interest rates in developed markets, hindering discretionary spending in major economies.