The Real Reasons Why IT Stocks Are Falling Despite Strong Fundamentals

The Market Carnage: Numbers That Tell the Story

The Indian IT sector is experiencing unprecedented turmoil that has rattled even seasoned investors. On February 12, 2026, the Nifty IT index crashed nearly 5.51%, wiping out ₹1.3 to ₹1.6 lakh crore in a single trading session. This wasn’t just another bad day—it marked the culmination of mounting pressures that have been building for months.

Tata Consultancy Services (TCS), India’s largest IT services company, saw its market capitalization slip below the psychologically important ₹10 lakh crore mark for the first time since December 2020. Infosys and LTIMindtree led the losses with declines exceeding 7% in early February, while Wipro, HCL Tech, and Coforge also witnessed significant erosion in shareholder value. The broader market sentiment towards IT stocks has shifted from cautious optimism to outright pessimism.

Understanding stock market fear becomes critical in such scenarios, as emotional decision-making can lead to substantial losses for retail investors who panic-sell at the bottom.

Three Forces Destroying IT Stock Valuations

The current IT stocks falling crisis isn’t driven by a single factor but rather a convergence of three powerful forces that are reshaping the global technology landscape. Each force independently would have been manageable, but their simultaneous occurrence has created a toxic environment for IT stock valuations that demands careful analysis.

Force #1: Artificial Intelligence Revolution

AI technology is fundamentally challenging the traditional IT services business model that Indian companies have perfected over three decades. Advanced AI tools are automating routine coding tasks, reducing project timelines, and threatening the headcount-based revenue model that has been the backbone of Indian IT profitability. Companies that once needed teams of 50 developers for a six-month project can now achieve similar results with 20 developers in three months using AI-assisted development tools.

Force #2: US Monetary Policy Uncertainty

Strong US employment data released in early February 2026 showed the unemployment rate dropping marginally, significantly reducing market expectations for Federal Reserve interest rate cuts. Higher rates for longer periods make investors cautious about growth and technology stocks, particularly those dependent on US corporate spending—which accounts for 60-65% of revenue for Indian IT majors.

Force #3: Global Tech Sector Reset

The tech-heavy Nasdaq Composite fell approximately 2.04% in early February 2026, reflecting a broader reassessment of technology valuations globally. This selloff was triggered by concerns about companies like Anthropic introducing AI products that threaten established software and tech companies’ business models, creating a ripple effect across global markets.

AI Disruption: The Existential Threat Nobody Can Ignore

Artificial intelligence represents the most significant structural challenge facing Indian IT companies since the sector’s inception. Unlike cyclical downturns driven by economic conditions, AI disruption is permanent and transformative. The traditional outsourcing model—built on labor arbitrage and billing based on person-hours—faces obsolescence as AI tools dramatically improve productivity.

The shift from simple AI use cases to complex, agentic AI applications is forcing clients to reconsider their technology spending strategies. Companies that previously outsourced application development and maintenance to Indian IT firms are now exploring AI-driven alternatives that promise faster delivery at lower costs. This transition threatens high-margin application services revenue, which has historically been the profit engine for companies like Infosys, TCS, and Wipro.

Investors fear that AI could create a deflationary environment where the same work generates significantly less revenue. Even if Indian IT companies successfully adopt AI to improve their own productivity, the overall revenue pool may shrink as clients need fewer person-hours to achieve their technology objectives. This explains why the market has assigned lower valuations to IT stocks despite stable current financials.

Major global technology companies like Microsoft and Google have announced multibillion-dollar investments in AI infrastructure in India, signaling their commitment to building sovereign AI capabilities. While this creates opportunities, it also intensifies competition and raises questions about the future role of traditional IT services providers in an AI-first world.

US Federal Reserve Policy Impact on IT Stocks

The US Federal Reserve’s monetary policy stance has emerged as a critical short-term driver of IT stock performance. Strong employment data showing resilience in the US labor market has pushed back expectations for interest rate cuts, which has profound implications for technology stocks globally and Indian IT companies specifically.

Higher interest rates increase the cost of capital for US corporations, making them more cautious about discretionary technology spending. Since Indian IT companies derive 60-65% of their revenue from North American clients, any slowdown in US tech spending directly impacts their growth prospects. The persistent high-rate environment also makes investors shift allocation away from growth stocks toward defensive sectors and fixed-income securities offering attractive yields.

Market experts note that technology stocks, including Indian IT services companies, typically trade at premium valuations based on future growth expectations. When interest rates remain elevated, the present value of those future cash flows decreases, leading to valuation compression. This mathematical reality—independent of company-specific performance—explains why fundamentally strong IT companies are seeing their stock prices decline.

Nasdaq Selloff and Contagion Effect

The correlation between US technology stocks and Indian IT stocks has never been more apparent than in recent weeks. The Nasdaq Composite’s 2.04% decline in early February 2026 immediately triggered panic selling in Indian IT stocks, demonstrating how interconnected global technology markets have become.

This contagion occurs because institutional investors often treat technology as a global sector rather than making country-specific distinctions. When US tech stocks fall due to AI disruption concerns or valuation worries, fund managers reduce exposure to technology globally, including Indian IT stocks. The selloff becomes self-reinforcing as algorithmic trading systems detect weakness and trigger additional selling pressure.

Interestingly, some market analysts view this as potentially beneficial for India in the long term. The AI-driven rally of 2025 largely benefited US technology companies while Indian IT stocks lagged. Now that the AI trade is unwinding and valuations are resetting, Indian IT companies trading at more reasonable multiples may attract value investors looking for quality technology exposure at attractive prices.

Investors making common stock market mistakes often sell during such correction phases, missing the eventual recovery when fundamentals reassert themselves over short-term sentiment.

Business Model Under Siege: Structural Challenges Ahead

Beyond the immediate market turbulence lies a more fundamental question about the sustainability of the traditional IT services business model. The headcount-based billing structure that generated consistent profits for three decades now faces structural obsolescence as productivity-enhancing technologies reduce the need for large teams.

The shift toward outcome-based pricing rather than effort-based billing fundamentally changes the economics of IT services. Clients increasingly expect to pay for results and business value rather than the number of people assigned to their projects. This transition requires IT companies to develop new capabilities in consulting, strategic advisory, and platform-based solutions rather than just providing skilled labor.

The challenge is particularly acute in routine-heavy segments like application maintenance and infrastructure management, where AI tools can automate repetitive tasks with minimal human intervention. Companies that fail to transition to higher-value services risk becoming commoditized providers competing primarily on price—a losing proposition given rising wage costs in India.

How Major IT Companies Are Affected

Tata Consultancy Services (TCS)

As India’s largest IT services company, TCS has been hit particularly hard by the recent selloff. Its market capitalization falling below ₹10 lakh crore represents a significant psychological blow to investor confidence. TCS reported a downbeat revenue performance in its recent quarterly results, with a guarded outlook that prompted brokerages to trim earnings expectations for FY26 and FY27 by 2-3%.

Despite these near-term pressures, TCS maintains strong fundamentals with consistent profitability and a diversified client base. The company has been investing heavily in AI capabilities and platforms to transform its service delivery model, but these investments will take time to translate into revenue growth. Analysts note that TCS’s relatively inexpensive valuation following the recent decline may provide a good entry point for long-term investors.

Infosys

Infosys has experienced some of the steepest declines, with shares falling 6-7% in single sessions during February 2026. The company’s American Depositary Receipts (ADRs) trading in the US market declined 5.56%, reflecting global investor concerns about the Indian IT sector’s prospects. Infosys has been attempting to differentiate itself through digital transformation services and cloud migration capabilities, but these higher-growth segments haven’t fully offset concerns about the core business.

The company faces particular scrutiny over its ability to maintain pricing power in an AI-driven environment. Infosys has historically commanded premium rates due to its consulting capabilities and industry expertise, but clients are increasingly questioning whether they should pay premium prices for services that AI tools can partially automate.

Wipro

Wipro reported Q1 FY26 revenue of $2.59 billion with IT services operating margins at 17.3% and strong bookings of $5 billion including two mega deals. However, its share price of approximately ₹249 reflects persistent market skepticism about execution capabilities. Wipro trades at a significant valuation discount compared to TCS and Infosys, representing a 12x valuation gap versus TCS that highlights investor concerns about the company’s competitive position.

The company has been undergoing a multi-year transformation to improve operational efficiency and win larger deals, but progress has been slower than expected. Wipro’s ADRs fell 4.83% during the recent selloff, indicating that global investors remain unconvinced about the company’s ability to navigate the AI disruption challenge effectively.

HCL Tech, LTIMindtree, and Mid-Tier Players

Mid-tier IT companies like HCL Technologies, LTIMindtree, and Coforge have also faced significant selling pressure. LTIMindtree and Infosys led losses with declines exceeding 7% in early February. Coforge experienced a 3.8% decrease, while smaller players across the board witnessed similar patterns of heavy selling as investors indiscriminately reduced technology sector exposure.

These mid-tier companies face the dual challenge of competing with larger players’ scale advantages while also defending against disruption from AI-native startups and platform-based competitors. Their ability to carve out defensible niches in specialized domains may determine their survival as the industry undergoes this structural transformation.

What Investors Need to Know Right Now

Navigating the current IT stocks falling crisis requires a balanced perspective that acknowledges both the legitimate structural concerns and the potential for overreaction by panicked markets. Long-term investors should distinguish between cyclical challenges that will eventually reverse and structural disruptions that require fundamental reassessment of investment theses.

The current decline presents a classic investment dilemma: Is this a buying opportunity created by temporary pessimism, or the beginning of a prolonged bear market driven by permanent business model disruption? The answer likely varies by company based on their strategic positioning, management quality, and adaptability to the AI-driven future.

Investors should consider several key factors when evaluating IT stocks at current levels:

• Valuation metrics: Many IT stocks now trade at valuations last seen during the COVID-19 pandemic lows, potentially offering attractive entry points for patient investors
• AI readiness: Companies actively integrating AI into their service delivery and developing AI-native offerings may emerge stronger from this transition
• Client diversification: Firms with geographically and industry-diverse client bases face lower concentration risk if specific sectors reduce tech spending
• Margin resilience: Companies maintaining stable or improving margins despite headwinds demonstrate operational excellence that will prove valuable long-term
• Deal pipeline: Strong booking momentum and healthy deal pipelines indicate client confidence despite broader uncertainty

Applying principles from systematic investment strategies like the Nifty 50 approach can help investors maintain discipline during volatile periods rather than making emotion-driven decisions.

It’s worth noting that the IT sector remains fundamentally important to the Indian economy and global technology ecosystem. The Ministry of Electronics and Information Technology continues to support the sector’s development, recognizing its critical role in India’s economic growth. The sector’s long-term prospects remain intact even as the business model evolves.

Future Outlook and Recovery Prospects

The path forward for Indian IT stocks depends on how successfully companies navigate the AI transition while maintaining profitability during the transformation period. The sector faces a 2-3 year adjustment phase where traditional revenue streams may stagnate or decline while new AI-enabled services gradually gain traction.

Several factors could catalyze a recovery in IT stock valuations:

• Clarity on US Federal Reserve policy direction and potential rate cuts later in 2026
• Successful commercialization of AI-powered service offerings by Indian IT companies
• Stabilization of US technology spending and resumption of digital transformation initiatives
• Resolution of visa policy uncertainties affecting talent deployment models
• Improved earnings guidance from companies demonstrating their ability to maintain margins despite AI disruption

The expansion of Global Capability Centers (GCCs) in India represents a potential bright spot. Multinational corporations establishing captive technology centers in India to manage regulatory risk and reduce dependence on external IT services providers paradoxically create opportunities for Indian IT companies to provide platform services, consulting, and specialized talent to these GCCs.

Microsoft’s commitment to invest $17.5 billion in India to build cloud and AI infrastructure demonstrates global technology leaders’ confidence in India’s technology ecosystem. Similarly, Google’s investments in sovereign AI infrastructure position India as a critical hub in the global AI value chain. Indian IT companies that align themselves with these mega-trends can capture significant value despite near-term headwinds.

The critical shift toward agentic, workflow-driven AI embedded directly into business processes represents the next frontier. Revenue impact will follow where AI is tightly integrated into products, customer journeys, and pricing or risk decisions. Companies successfully making this transition will emerge as winners in the post-disruption landscape.

For investors planning their portfolio for the year ahead, consulting the NSE BSE trading calendar helps in timing investments around market holidays and settlement cycles.

Learning how to identify undervalued stocks using fundamental metrics becomes especially valuable during correction phases when quality companies trade at temporarily depressed valuations due to sector-wide pessimism.

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