Key Points

Analysts assumed less macro volatility in the coming quarters and expected some recovery in growth in FY27, the report from HSBC Global Investment Research said.

The IT services sector is unlikely to see a turnaround in Q2 FY26, with demand remaining soft amid macroeconomic uncertainty and the deflationary impact of artificial intelligence, it said.

These factors may not "improve until FY27, in our view, as global headwinds provide a cushion to pricing pressure," the report added, providing a 'buy' rating on many IT stocks.

Growth in the second quarter is expected to stay in line with the first quarter, driven largely by vendor consolidation and cost-rationalisation deals, which HSBC called a "zero-sum game."

"Sustainable growth rate for the sector is unlikely to be more than 4-5 per cent, though over the past three years growth has been below even this trend rate. While FY24 and FY25 were impacted by loss of share to GCCs, FY26 has been impacted by both AI deflation and an uncertain macro environment," the research firm said.

Even though recent US corporate results are quite solid corporates are still holding back discretionary new initiatives, the report noted.

Quarterly expectations indicate that large-cap IT firms are expected to achieve 0-2 per cent sequential growth in dollar terms. Mid-tier companies may experience a decline of 1 per cent to growth of 5.5 per cent, the firm forecasted.

The firm, however, maintained that large-cap IT stocks are no longer five-year buy-and-hold compounding stocks and instead require active management around their cycles/volatility.

- IANS