Why Are IT Stocks Falling? AI Disruption Concerns & IT Sector Outlook 2026

Indian IT stocks have corrected sharply in recent weeks.

The Nifty IT index has declined meaningfully, raising key investor questions

• Why are IT stocks falling?
• Is AI disrupting traditional IT services?
• Has the correction already priced in the risks?
• What is the outlook for IT stocks in 2026?

Here’s a clear breakdown.

Why Are IT Stocks Falling in 2026?

The recent sell-off in IT stocks has been driven by AI-related disruption concerns.

The trigger was the launch of AI-enabled workplace solutions that can

• Write code
• Fix bugs
• Deploy systems faster

This raised concerns about structural disruption to traditional Application Development & Maintenance (ADM) and testing revenues.

These segments contribute nearly one-third of industry revenues.

Industry estimates suggest

• Generative AI could impact roughly 25 to 30% of traditional application development, testing, and maintenance work.
• This may potentially result in a 10 to 12% dent in overall revenues over 3 to 4 years.

The correction is therefore driven by medium-term demand concerns, not immediate earnings downgrades.

How Much Have IT Stocks Corrected?

The Nifty IT index has

• Corrected sharply in recent weeks
• Declined around 9% in one week
• Fallen approximately 15% over the last month
• Completed nearly a 30% correction from its peak

Historically, since CY-06

• The IT index has witnessed a maximum price correction of around 34%.
• Time-wise corrections have lasted 6–7 quarters.
• Post such phases, the index has typically made new highs.

The current correction is therefore close to historical price correction averages.

Is This an Earnings-Led Sell-Off?

The sell-off is not driven by immediate earnings downgrades.

Instead, markets are reacting to

• Medium-term structural concerns
• The possibility that AI tools could reduce the need for large engineering teams
• Slower hiring and workforce rationalisation

The dual impact observed includes

• Slower hiring
• Efficiency gains from AI adoption

Are Valuations Becoming Supportive?

After the recent decline, valuations have adjusted meaningfully.

For example,

• TCS is trading at a notable discount to its 10-year median PE.
• Infosys is trading below its long-term historical average.
• Several IT stocks are trading below long-term averages after a 1–3-year correction.

This suggests that a significant portion of the disruption risk may already be reflected in prices.

Which IT Companies Are Better Positioned?

From an outlook perspective, the stance remains selectively positive.

Companies with

• Strong AI capabilities
• Digital transformation exposure
• Healthy deal pipelines

are considered better positioned for the next growth phase.

Preferred names mentioned include

• TCS
• LTIMindtree
• Persistent Systems

Persistent Systems stands out due to

• Strong growth visibility
• Capability in AI-led services
• Valuation comfort relative to historical averages

Additionally, digital platform and analytics-based businesses such as

• Affle
• LatentView Analytics

are also seen as opportunities within the broader digital theme.

What About a Staggered Approach?

For risk-neutral investors, a staggered investment strategy via IT ETFs over the next few quarters is suggested as a prudent approach.

This aligns with

• Price correction nearing historical maturity
• Time correction approaching historical averages
• Valuations turning supportive

IT Sector Outlook 2026

The IT sector is undergoing

• A structural transition driven by AI
• Workforce rationalisation and productivity shifts
• Valuation re-adjustment

At the same time

• The correction magnitude is near historical averages.
• Valuations are below long-term averages.
• Selective positioning remains constructive.

The focus going forward remains on

• AI capability building
• Digital services strength
• Balance sheet resilience

FAQs

Why are IT stocks falling in India?

IT stocks are falling due to concerns that AI tools could disrupt traditional application development, testing, and maintenance services.

Is this correction earnings-driven?

No. The sell-off is not driven by immediate earnings downgrades but by medium-term structural concerns.

How much has the IT index corrected?

The IT index has corrected nearly 30% from its peak, which is close to historical correction averages.

Are valuations attractive now?

Several IT stocks are trading below long-term average valuations, suggesting that disruption risks may already be priced in to some extent.