Global markets are witnessing a striking divergence.
This isn't random—it's a calculated rotation driven by Foreign Portfolio Investors (FPIs) reassessing the AI trade.
The firm added Infosys to its model portfolio and increased its allocation to Coforge. The logic is straightforward: the AI trade that drew $29 billion out of Indian equities in the first half of 2026 is now facing serious questions about sustainability. As skepticism grows around the massive capital expenditures required for AI infrastructure, investors are rotating toward asset-light, cash-generative software services companies that can benefit from AI adoption without bearing the infrastructure risk.
The current rally follows a brutal correction. The Nifty IT index has fallen 25% year-to-date, with the top four majors—Tata Consultancy Services, Infosys, HCL Technologies, and Wipro—trading 35-50% below their two-year peaks. This decline wasn't driven by weak fundamentals alone. It was a perfect storm of GenAI disruption fears, macroeconomic uncertainty, and geopolitical headwinds.
Investors grew increasingly concerned that sophisticated AI systems from companies like OpenAI and Anthropic could automate traditional IT services—contract review, software vulnerability detection, legacy code modernization—potentially reducing outsourcing demand. This structural fear, combined with subdued discretionary spending and pricing pressure, triggered a massive derating. Yet, interestingly, adverse sector developments are now triggering much smaller share price declines. When Infosys recently cut its FY27 revenue guidance, the stock dropped only 0.8% after recovering from a 3% intraday decline. This resilience suggests seller exhaustion and a potential tactical bottom.
The severity of the correction has created compelling value.
This valuation compression provides significant scope for a tactical rebound if AI trade sentiment reverses.
Jefferies expects revenue growth to remain in the low-to-mid single digits through FY28, reflecting structural challenges. AI is expected to cause 2-3% annual revenue deflation in traditional managed services, which currently contribute 22-45% of revenues. However, much of this pessimism appears priced in. The sector trades at 16.1 times one-year forward earnings, a level that historically has offered strong downside protection. If the AI trade continues to cool and FPI flows normalize—as they already have, with $3 billion of net inflows in the last five weeks—these multiples could re-rate higher.
While large-cap IT stocks are recovering, mid-cap companies like Coforge and Persistent Systems are delivering stronger gains of 3-5%. This outperformance stems from structural advantages in the AI era.
Mid-caps have built AI-centric business models from the ground up rather than adapting legacy systems. Coforge reported 42.8% YoY revenue growth in Q3 FY25, while Persistent Systems is targeting a $5 billion revenue run-rate by FY31, implying 22.8% CAGR. These companies specialize in AI-led platform services, cloud security, and digital engineering—areas seeing strong demand even as traditional outsourcing faces pressure. Their niche expertise, faster decision-making, and agile operating models allow them to capture AI implementation opportunities more effectively than their larger peers. Investors are rewarding this growth-at-a-premium thesis, even though mid-caps trade at higher valuations.
The divergence between Indian IT and global AI hardware stocks reveals a fundamental shift in investor expectations. Samsung Electronics and SK Hynix have fallen sharply despite reporting record profits because investors are questioning whether the massive spending on AI infrastructure will generate adequate returns. The Philadelphia Semiconductor Index has plunged over 25% from its June peak, while the Nasdaq 100 has entered correction territory, dropping 10% in just 38 trading days.
This skepticism stems from several factors.
There are also concerns about Chinese competition—
This competitive pressure could lead to pricing pressure and market share erosion for Korean incumbents.
Indian IT companies, by contrast, don't face these infrastructure risks. They operate asset-light models, helping enterprises implement AI rather than building the chips and data centers that power it. As global markets reassess whether massive AI infrastructure spending can generate sufficient returns, India's cash-rich software companies are increasingly viewed as a safer way to participate in the AI transformation.
Jefferies' sector upgrade is backed by three key rationales: attractive valuations after the sharp correction, potential for tactical upside if the AI trade reverses, and technical signals indicating a bottom. The brokerage is funding its increased IT exposure by trimming overweight positions in power, real estate, and hospitals—sectors that may have run up too far and now offer less attractive risk-reward.
This rotation reveals important insights about relative sector attractiveness. Power, real estate, and hospitals are either highly cyclical or facing valuation headwinds. IT, despite its growth challenges, offers defensive characteristics through strong balance sheets and cash flows, combined with global diversification benefits. The fact that adverse news now triggers muted share price declines suggests that smart money is using dips to accumulate positions.
The Indian IT sector remains in transition. Revenue growth will likely stay subdued in the near term as enterprises prioritize cost optimization over discretionary transformation projects. The structural shift from human effort-based billing to AI-driven outcome-based delivery models will continue to pressure traditional managed services. However, the worst of the pessimism may be priced in.
For investors, the key is distinguishing between companies that will be disrupted by AI and those that will benefit from it. Large-caps like Infosys and Tata Consultancy Services offer stability and dividends at attractive valuations. Mid-caps like Coforge and Persistent Systems offer superior growth through AI-native capabilities. The current divergence between AI hardware skepticism and IT services optimism represents a tactical opportunity—but one that requires careful stock selection and patience as the sector navigates its AI transition.
