'Not a buying moment': Analysts wary of IT stocks amid Moody's US downgrade

Moody's downgrades US rating: Analysts see IT sector taking longer-than-expected to yield returns. Investors, they believe, should brace for near-term pressure

IT stocks to buy/sell: Investors holding information technology (IT) stocks in their portfolios seem to be stuck at crossroads. While US President Donald Trump's 90-day tariff pause and hard negotiations to strike deals with various countries, including India and China, lifted sentiment, Moody's downgrade of the economy’s credit ratings has clouded the outlook.

 

Moody’s downgrades US ratings

On May 16, Moody's Ratings downgraded the US' long-term issuer and senior unsecured ratings by one notch to ‘Aa1’ from ‘Aaa’. This ended the US’ top-tier sovereign credit status as the agency saw the States grappling with sustained fiscal deterioration, rising debt levels, and growing interest burdens. 

 

Analysts said Moody’s downgrade of US’ credit ratings, which follows similar actions by Fitch and S&P, hint at tighter government spending and potentially reduced discretionary IT budgets.

  Further, as bond yields (US Treasury yields) have spiked after the downgrade, the US economy’s growth rate will be further impacted by the higher borrowing costs.   ALSO READ | Moody's US downgrade deepens investor fears over rising fiscal risks 

"Given that there is a direct correlation between the US' GDP growth and tech spending by corporates, the prospects of IT companies look rather dim in the near-term. The single digit revenue growth rates of IT companies do not warrant their expensive valuations," cautioned VK Vijayakumar, chief investment strategist at Geojit Investments. 

Going ahead, analysts see near-term pressure on IT stocks amid rising sectoral headwinds and expensive valuations. Long-term investors, they added, should wait for further correction in IT stock to enter the pack.  

  "This is not a broad-based 'buy-the-sector' moment. While the sector has underperformed, valuations are not uniformly cheap yet, and earnings downgrades are still trickling in for financial year 2025-26 (FY26). Patience will be key," said Sonam Srivastava, founder and fund manager at Wright Research. 

So far in calendar year 2025, Nifty IT stocks have tumbled between 7.6 per cent and 34 per cent on the National Stock Exchange, dragged by Oracle Financial Services, Wipro, Infosys, Coforge, Tata Consultancy Services (TCS), and HCL Tech. 

  By comparison, the Nifty IT index has slipped 14 per cent, while the Nifty50 has risen 4.4 per cent.  

Valuation-wise, the Nifty IT index is trading at a price-to-earnings (P/E) multiple of 29.1 times as against its 5-year average of 29.3x. Among individual stocks, Coforge is at 67.5x vs 44.3x, HCL Tech at 25.8x vs 22.7x, and Tech M at 36.7x vs 28.5x, Bloomberg data shows.  ALSO READ | Pharma shares in focus; GSK, Jubilant, Eris, Gland, Torrent rally up to 8%

 

Should you buy IT stocks?

According to analysts, while deal conversion cycles have elongated, especially for discretionary and transformation-driven project, US’ push to de-risk China and strengthen trade ties with like-minded economies, including India, creates a structural tailwind for Indian IT over the medium-term, particularly for firms aligned with digital infrastructure, artificial intelligence (AI), and cybersecurity.

 

Investment strategy for IT stocks, Sonam Srivastava of Wright Research said, should be to focus on selective accumulation.

 

"Investors should emphasize companies with annuity-heavy revenue, exposure to cost-takeout deals, and strong positioning in AI/cloud. The sector could see tailwinds later in FY26 as global tech spends bottom out and trade realignments play out in India's favor," she said, adding that large-cap players with resilient deal pipelines and cost optimisation tailwinds, like Infosys and TCS, offer relative safety.  ALSO READ | Moody's downgrade of US rating may not dent stock markets much: Analysts 

Echoing similar views, Apurva Sheth, head of market perspectives and research at SAMCO Securities, said the US efforts to secure trade deals and stabilise inflation offer long-term tailwinds.

 

"As GenAI adoption, cost takeout deals, and cloud modernisation remain strong themes investors should focus on tier-I names like Infosys, TCS, and HCL Tech, while staying selective on midcaps," he suggested.