IT Stocks Edge Higher – Yet a Lasting Turnaround?

Indian technology shares have managed to claw back a slice of the ground they lost earlier this year. A handful of days of buying pressure lifted the Nifty‑IT index back above the 13,000 mark, prompting many retail investors to wonder whether the sector finally turned a corner.

Rajesh Kothari, the managing director and founder of AlfAccurate Advisors, says the answer isn’t crystal‑clear. "The bounce is encouraging, but I wouldn’t rush to label it a sustained recovery," he told Moneycontrol. "We need to see if earnings are really improving or if we’re just watching a technical bounce off oversold levels."

He flags three key themes that will determine whether the rally solidifies into a genuine upside.

1. Demand visibility. The bulk of the sector’s growth still hinges on discretionary technology spend in the US and Europe. While some large contracts have been signed, the crucial test will be whether those deals translate into consistent revenue growth over the next few quarters.

2. AI – friend or foe? Artificial intelligence is the buzzword du jour, and it does open up fresh revenue streams – think AI‑driven consulting, cloud services, or data‑analytics platforms. Yet the same technology can also upend traditional billing models, squeezing margins if pricing power erodes.

3. Valuations versus earnings expectations. A sharp rally can push price‑to‑earnings multiples ahead of fundamentals. If stocks get ahead of their earnings outlook, profit‑taking could follow quickly, erasing the gains.

When asked whether a blanket “sell‑on‑rise” rule makes sense, Kothari cautions against both extremes. "Selling on every uptick is premature, but chasing the rally without scrutiny is equally risky. I look for companies that show clearer growth visibility, solid client relationships and a credible AI monetisation story. The rest are still navigating weak demand and should be approached with care," he explains.

The conversation then shifted to the political arena. The United States mid‑term elections are set to conclude later this month, and many market participants wonder if the outcome could turbo‑charge Indian equities.

Kothari’s view is measured. "A political shock can act as a catalyst, but it won’t, on its own, sustain a rally or trigger a dramatic fall in crude oil prices. I’ll be watching oil‑supply dynamics, the dollar’s trajectory, bond yields and corporate earnings before I tweak my portfolio," he says.

On the oil front, a sharp correction in crude is unlikely to be a direct by‑product of US election results. Instead, the market will respond more to fundamentals – OPEC decisions, inventory builds and geopolitical tensions.

Turning to the consumption space, Kothari draws a line between essential and discretionary spending. He notes that fast‑frequency data – retail credit growth, two‑wheeler sales, and similar metrics – are showing a modest uptick.

"I’d be selective, not uniformly cautious. Companies with strong brands, good distribution, pricing power and healthy balance sheets are preferable. In the discretionary segment, volume growth matters more than price hikes alone," he advises.

Climate‑related risks also made the list. El Niño, the periodic warming of Pacific waters, could hit Indian agriculture and push food prices higher, with knock‑on effects on rural demand.

"It’s a risk, but not a crisis‑maker on its own. I keep an eye on crop forecasts, reservoir levels and food‑price trends before I let it influence my macro outlook," Kothari says.

On monetary policy, the Fed’s upcoming October 27‑28 meeting is under the microscope. While some analysts predict a pause in rate hikes, Kothari warns against treating a pause as a certainty.

"The decision itself may be less important than the Fed’s commentary on the balance between inflation and growth. A nuanced read of that language will shape expectations for the next few months," he notes.

He also addressed concerns about a potential US fiscal crunch. Though the fiscal outlook deserves close monitoring, Kothari says it’s unwise to build a portfolio on the assumption of an imminent crisis.

"What matters more is how higher global yields, currency volatility and tighter financial conditions filter down to individual businesses. Those are the real variables that affect valuations," he adds.

Lastly, the Q2FY27 earnings season for Indian banks wrapped up with most institutions posting solid disbursement growth and healthy asset quality.

"I’m still constructive on quality banks over the medium term, but I’m picky about valuations. I look for sustainable core income, strong funding franchises and reasonable price tags," Kothari concludes.

In short, the IT rally is a welcome sign, but investors should stay vigilant, check the earnings story, keep tabs on macro drivers, and avoid one‑size‑fits‑all trading rules.