Why IT stocks saw the biggest single-day surge since September 2020
The IT sector experienced a significant surge on July 14, with the Nifty IT pack registering its biggest single-day increase since September 2020. This surge propelled both the Sensex and Nifty indices to reach record highs. Several factors contributed to the positive performance of IT stocks:
1. Earnings Reports: Three major IT companies reported their Q1 numbers, which were likely positive and exceeded market expectations. Positive earnings results often lead to increased investor confidence and higher stock prices.
2. US Federal Reserve’s Monetary Policy: There were expectations that the US Federal Reserve would pause its rate hikes. This expectation created a positive sentiment in global equity markets, including the IT sector, as it reduces the cost of borrowing for businesses and stimulates economic growth.
3. Global Equity Market Optimism: Positive sentiments in global equity markets can have a spillover effect on the IT sector, as it is a globally interconnected industry. When international markets perform well, it creates a favorable environment for IT companies, leading to increased investor interest and higher stock prices.
It’s important to note that the stock market is influenced by various factors, and the performance of the IT sector can be influenced by both domestic and international events, including economic indicators, industry-specific developments, and geopolitical factors.
During the day, the strong gains in the stock market were primarily driven by major IT companies, namely Tata Consultancy Services (TCS), HCLTech, and Wipro. Interestingly, these companies reported sluggish growth and provided a cautious outlook for the upcoming quarters, but still saw significant gains. Here’s an expansion of the mentioned IT stocks and their respective gains:
1. TCS (Tata Consultancy Services): TCS witnessed the highest gain of 5 percent among the IT majors. Despite reporting sluggish growth and a cautious outlook, the market responded positively to TCS’s performance, leading to increased investor interest and a rise in stock prices.
2. Infosys: Infosys, another prominent IT company, experienced a gain of 4 percent. Although specific details about its performance were not mentioned, it likely benefited from the overall positive sentiment in the IT sector.
3. Tech Mahindra: Tech Mahindra, a leading IT services and consulting company, saw a gain of 4.3 percent. Similar to other IT majors, Tech Mahindra’s stock price rose, possibly due to the overall positive market sentiment and expectations for the IT sector.
4. HCLTech: HCL Technologies, despite reporting sluggish growth and a cautious outlook, gained 4 percent. This indicates that investors may have focused on other positive factors such as strong client relationships, market positioning, or potential growth opportunities.
5. Wipro: Wipro witnessed a gain of 3 percent. Despite its cautious outlook, Wipro’s stock price increased, likely influenced by the positive sentiment in the IT sector and the overall market rally.
Additionally, other IT companies like Mphasis and LTTS (L&T Technology Services) experienced significant gains. Mphasis gained 7.95 percent, while LTTS saw an increase of 5.70 percent. These gains could be attributed to various factors, including company-specific performance, positive market sentiment, and investor optimism.
Overall, the IT sector’s performance on July 14 showcased strong gains despite some companies reporting sluggish growth and offering cautious outlooks for future quarters. It highlights the complex nature of stock market dynamics and the influence of multiple factors on stock prices.
Vinod Nair, Head of Research at Geojit Financial Services, mentioned that the controlled inflation in the US has created optimism among investors that a 25-basis point rate hike would be sufficient to stabilize the US economy. This positive outlook has led to strong buying in Indian IT stocks, despite muted Q1 earnings. The performance of IT stocks is also seen as a reflection of the NASDAQ index, which has rallied 3.44 percent in the past week.
Brokerages, however, remain cautious about the IT sector due to the limited visibility ahead and the muted performance of several companies in the current earnings season. Amol Athawale, Vice President for Technical Research at Kotak Securities, noted that the remarkable rally in IT stocks followed better-than-expected earnings from select leading tech companies, which triggered a late surge in the sector.
Sumeet Jain, VP, Technology Sector at ICICI Securities, mentioned that there is a lot of “hope trade” happening with IT stocks, and the overall expectation is that quarter-on-quarter growth will start to improve. He highlighted the strong performance of the NASDAQ and technology stocks year-to-date, driven by the promise of generative AI and long-term revenue expectations.
Amit Chandra, Deputy Vice-President at HDFC Securities, pointed out that deal wins in the IT sector have been strong, and the second half of the fiscal year is expected to see a recovery. He noted a growing divergence between the NASDAQ and the Nifty IT pack in the past three months, after nearly a decade of correlation. However, he emphasized that the IT sector is not expected to face further challenges, and the growth visibility for FY25 looks positive. Despite a potential decrease in growth rates compared to the pre-COVID period, the incremental growth in the IT sector is expected to be significantly higher.
HCL Technologies has maintained its guidance for FY24, anticipating a revival in demand in Q2, while TCS reported numbers in line with expectations, and Wipro’s guidance for Q2 was slightly better than expected.
