Can Nifty IT take comfort from its largest market being on the mend?

Nifty IT index rallied three percent this week, of which two percent came on Friday itself. This follows the extremely strong US macro data, whether its US GDP increasing at a 2.0 percent annualised rate last quarter, which was revised up from the 1.3 percent pace reported last month and higher than estimate of 1.4 percent, or the US initial jobless claims print once again showcasing the strength of the US labour market or latest consumer confidence reading which was at the highest level since Jan 2022.

Even the stress test data on the US banks should give analysts a lot of comfort. All the 23 big banks in the US passed the Federal reserve stress test. Remember, it was the weakness in the US regional banks which led the decline in discretionary spend, projects being put on hold in the fourth quarter. There was weakness in other sectors like telecom and hitech too, but it was negative sentiment was dominated by the US banks.

If the US consumer confidence is improving, and banks financial position can weather the most severe recession, then is it possible that US corporate decision making and spending comes back in H2FY24?

Rajesh Gopinanthan, the outgoing CEO of TCS had said in April, that US reacts fast on the downside as well as on the upside and if current uncertainty goes away, can expect a significant pop at year end.

And It looks like based on the US eco data, that the macro uncertainty has receded and expectations of a recession are being pushed. Investors have priced in a very muted first quarter, so more than the numbers they will be looking for green shoots in the form of corporate behaviour changes about decision making, among others when cos report results.

Most IT have stocks have rebounded 7-17 percent from their post Q4FY23 result lows which was hit on the day of Infosys results, yet valuations are still reasonable. UBS says The sector is trading at a six percent discount to its five-year rolling average, and think valuations imply limited downside unless there is meaningful deceleration.