JM Financial reports that the IT sector's intense valuation de-rating phase has ended, though a meaningful earnings recovery is expected only by 2027. While large IT firms face sluggish growth, mid and small-cap companies are showing stronger profit potential. Investors should monitor global crude oil prices and US Treasury yields as critical drivers for future foreign investment inflows into India.
The Indian IT sector may have passed the worst phase of valuation de-rating, according to recent insights from JM Financial. However, investors looking for a sharp turnaround should note that a broader earnings recovery is likely a 2027 story. The sector continues to navigate a transitional period where margin pressures and consolidated demand limit immediate upside for industry giants.
Industry leaders such as Tata Consultancy Services and Infosys are currently managing modest growth, reflecting the broader challenges within the IT services space. While institutional selling has largely eased, the absence of strong, broad-based earnings growth keeps the sector in a cautious phase for the near term.
Mid and Small-Cap Profit Growth
Beyond the large-cap IT space, the brokerage highlights that mid and small-cap companies are currently reporting faster profit growth compared to Nifty50 constituents. Excluding the volatility of the oil and gas sector, mid-cap firms have outperformed major market benchmarks.
Despite this performance, the primary challenge for investors is high valuations. Market expectations for future growth are already reflected in current stock prices, leaving little room for error. Analysts suggest that broad index investment might carry higher risks in this environment, favoring a disciplined, stock-specific strategy instead.
Global Macro Triggers for FII Flows
Foreign Institutional Investor (FII) interest, which saw significant outflows in September 2026, is expected to moderate as global conditions stabilize. Total FII ownership in Indian stocks has dropped to roughly 13.8 percent from 19.9 percent over the past decade.
The return of sustained foreign buying will likely depend on global macroeconomic signals. Specifically, a reduction in US 10-year Treasury yields and stability in crude oil prices are essential for improving the attractiveness of emerging markets like India. Additionally, developments in US fiscal policy and the impact of the ongoing conflict in the Middle East on oil benchmarks remain important variables that could influence India’s overall macroeconomic stability. Investors may track these global triggers and upcoming earnings reports from IT firms as key indicators in the coming quarters.