IT crowned 2025's worst sector: Are TCS, HCL Tech no longer buy-and-hold stocks?

Economic Times

2 days ago

Long revered as the ultimate buy-and-hold stocks for long-term investors, largecap IT stocks are now losing their charm with the Nifty IT index becoming the worst performing sector by plummeting 14% this year amid slowing growth and AI-led tech disruption. The dramatic reversal has left sector bellwether TCS shares down 21% in 2025 and trading 30% below its 52-week high, with peers like Infosys, HCL Tech, and Wipro all posting double-digit losses.
ADVERTISEMENT The sector's structural transformation has prompted a fundamental reassessment of investment strategy. HSBC delivered a stark warning that fundamentally changes the IT investment playbook:
"IT stocks (especially top-tier IT companies) are no longer five-year buy-and-hold compounding stocks; they now require a lot more active management around their cycles/volatility," HSBC analysts wrote. "The long-term stock return trajectory gradient will not only be lower than in the past, but stocks will also be a lot more cyclical around this mean path."
This represents a seismic shift for a sector that once delivered consistent compounding returns, now relegated to cyclical trading territory requiring active management.
Also Read | HCL Tech Q1 Results: Cons PAT slips 10% YoY to Rs 3,843 crore
The institutional abandonment tells the story of lost confidence. FII holding of IT Services has plunged to a 13-year low, while DII ownership has also fallen sharply recently. This massive institutional exodus has accelerated the sector's decline as smart money flees what were once considered India's safest large-cap bets.
ADVERTISEMENT TCS's soft Q1 numbers crystallized investor fears, with revenue missing consensus estimates as it fell 3.3% quarter-on-quarter in constant currency terms. The disappointing performance from the sector leader confirmed that all Tier-1 players are expected to report muted constant currency quarter-on-quarter revenue growth in Q1.Structural Headwinds Mount
ADVERTISEMENT The sector faces a perfect storm of challenges that extend far beyond typical cyclical pressures. IT stocks are being battered by weak discretionary spending by clients, macro and geopolitical uncertainty, and AI-led tech disruption that threatens traditional business models.Emkay Global explained the revenue growth trajectory challenges: "The revenue growth trajectory for IT companies in the last few quarters was impacted by: i) slower client decision-making amid macro uncertainties, b) re-prioritization of spending, with increased focus on cost efficiencies and optimization, which usually have a slower revenue conversion cycle, and c) focus on projects with immediate RoI."
ADVERTISEMENT "FY26 is expected to commence on a subdued note for IT players, as clients remain cautious on tech spending, particularly discretionary spending. Elevated macro and geopolitical uncertainty dampen the outlook for IT spending and could delay a broad-based recovery in client spending," Emkay analysts added.
Also Read | Wipro, Infosys and other IT stocks fall as weak TCS results, macro uncertainty weigh on sentiment
ADVERTISEMENT HSBC's medium-term outlook paints a sobering picture: "Growth for the sector has been low single digits in the past two years (FY24/25), owing to a high base, GCC expansion, GenAI ambiguity and above all weak/uncertain macro. FY26 is likely weak as well due to tariff impact. We maintain our long-standing expectation of 4-5% CAGR sector growth over the medium-to-long term. With a low base of three years (FY24-26), we expect a revival in FY27."This represents a dramatic comedown for a sector that once delivered high-teens growth rates consistently.Market veterans are increasingly bearish on largecap IT prospects. Samir Arora delivered a blunt assessment recently saying that IT services is not a great sector.Dalal Street veteran Nischal Maheshwari sees limited hope in the near term: "Within the IT space, you have to look for the midcaps. There you might still look at a 10-12% kind of growth.'"We have still not seen demand coming back strongly in the US and till tariff issues get out of the way, I do not think so there is going to be a fresh commitment of any capex across the world. So, we have to wait for a couple of more quarters or at least for one more quarter before we are going to start seeing some demand coming back. So, the second quarter also is going to be a wash out only for IT," Maheshwari added.The technical picture looks equally grim. Samco Securities identified a classic Head and Shoulders pattern: "The Nifty IT index is forming a classic Head and Shoulders pattern, a time-tested sign that often hints at trend exhaustion. After a strong rally, the left shoulder and head have already formed, and now the right shoulder is taking shape. The neckline sits around the 31,500 mark, acting as a crucial support. If the index breaks below this level, it could trigger a deeper correction.""What makes this more serious is the timing, global headwinds like rising US tech tariffs are adding pressure. This isn't just a chart pattern; it reflects both technical and fundamental stress. Watch closely, this pattern could be the market's way of ringing the bell before the party ends," Samco analysts warned.Anand James, Chief Market Strategist at Geojit Investments Limited, reinforced the bearish outlook: "Nifty IT index charts suggest strong selling pressure and a lack of buying interest. The weekly MACD histogram has formed a reversal candle, reinforcing the bearish sentiment. From a derivatives perspective, most constituent stocks have witnessed short additions on both daily and weekly timeframes, indicating sustained bearish positioning. This could potentially drag the index down towards the 37,050 level in the near term.""Any such recovery is likely to be met with renewed selling pressure. A sell on rise strategy may be employed," James concluded.The verdict is increasingly clear: India's IT sector has entered a new era where the old rules of buy-and-hold investing no longer apply, forcing investors to fundamentally rethink their approach to what were once considered the market's most reliable compounders.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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