AI stocks experienced significant volatility on Thursday, with the Nasdaq composite falling 1% and the S&P 500 declining 0.3% after careening between an initial gain of 1% and a midday loss of 2.3%, as reported by Reuters. The latest decline follows last week's industrywide sell-off, with investors weighing oil prices, Treasury yields and upcoming inflation data. Micron Technology exemplified the day's volatility, going from a jump of 4% to a plummet of 10%, before finishing with a drop of 1.4%. The computer memory company's stock has already tripled so far this year, raising criticism that it's gone too far, too fast. Marvell Technology dropped 7.6% and Advanced Micro Devices sank 3% after both AI winners also erased early-morning gains. According to Kotak Securities, concerns around rapid advances in artificial intelligence are adding to pressure on the sector, with Nifty IT Index down around 2% and falling around 27% in the last six months.
Information technology stocks such as Tata Consultancy Services, Infosys, Persistent Systems and Tech Mahindra descended on Thursday, June 11, after a tech sell-off in the US markets. The NIFTY IT index fell as much as 2.7% intraday before ending at 27,821, down 1.6% and marking the lowest closing level since May 15, as reported by The Economic Times. The index has fallen 26.6% so far this year, recording a closing value of 31,116.55. LTI Mindtree shares plunged nearly 3%, while Infosys and HCL Tech shares dropped nearly 2% each during Thursday's session. The stock of Tata Consultancy Services slid 1.54% to ₹2,120.70 per share, despite the company winning a multiyear transformation and managed services deal with global life and pensions insurer Canada Life on June 8 to modernise its IT infrastructure services across European businesses. Mid-tier technology companies were not spared either, with Mphasis and Persistent Systems dropping more than 2% each, while Wipro and L&T Technology Services lost around 1% during the session.
The latest decline was triggered by Anthropic's launch of Claude Fable 5 and Mythos 5 models on June 9, which have intensified concerns around revenue disruption for Indian IT services companies, particularly those with significant exposure to application development and maintenance (ADM) services. According to Kotak Securities senior vice-president Sumit Pokharna, "The newly launched model has higher capabilities than previous ones and the faster developments are increasing the pressure on application development and maintenance companies." The new AI models deliver significantly stronger software engineering capabilities, with AI-generated code quality approaching human levels and potentially surpassing it within the next year. "The key concern is that productivity improvements in software engineering are occurring much faster than in non-software domains. This increases the risk of lower effort requirements, reduced billing volumes, and pricing pressure for traditional application development and maintenance contracts," Pokharna said. Among large-cap IT companies, Infosys is considered relatively more exposed to application services, while HCLTech has comparatively lower exposure. Persistent Systems has one of the highest exposures to application development.
The selloff in Indian IT counters was triggered by US inflation soaring to 4.2% in the 12 months ending May, marking the largest gain since April 2023, according to the Labor Department's Bureau of Labor Statistics. The Consumer Price Index (CPI) advanced 3.8% year-on-year in April, with prices increasing 0.5% on a monthly basis after climbing 0.6% in April. Traders are pricing in a more than 70% chance of a US rate hike by December, as reported by Reuters, as inflation rises. The Indian IT companies derive a major portion of their revenue from the US economy, and rise in inflation in the country, as well as the Fed's rate hikes, are considered to reduce discretionary spending in the US, which in turn can impact the US-based Indian IT companies. The pressure intensified after Oracle shares plunged 8.9% in extended trading after the company projected fiscal 2027 capital expenditure above Wall Street estimates and announced plans to raise nearly $40 billion through a mix of debt and equity financing next year.
According to BNP Paribas IT analyst Kumar Rakesh, "The IT sector is in uncharted territory, given the prolonged revenue weakness during a generational technology shift driven by AI." He noted that "this makes it difficult to predict whether the worst is over." Despite improved valuations, the sector has not bottomed out as headwinds like AI disruption, likely rate hikes in the US and geopolitical turbulence continue to weigh on the sector. A cyclical recovery, possibly in September, could be the first sign of revival despite ongoing structural challenges, though this recovery could be delayed depending on geopolitical tensions. Kumar advised investors to "avoid companies that are struggling to transition and instead be extremely selective." He recommended Persistent Systems among midcaps, and Infosys and Tech Mahindra among large caps as preferred picks in the sector. "Pain periods do turn valuations attractive and staggered accumulation of Infosys, TCS, Tech Mahindra along with Coforge can be considered for a two- to three-year horizon," said Pokharna from Kotak Securities.
