IT Sector Will Continue to Face Uncertain Discretionary Spending in FY26 The probability of US rate cuts has diminished, and heightened geopolitical/tariff risks are weighing on short-term stability for US and European enterprises.

The Indian information technology (IT) services sector will continue to grapple with uncertainty in discretionary spending from its clients in FY26 in the absence of rate cuts and a conducive business environment in the US, the largest tech outsourcing market.

"The probability of US rate cuts has diminished, and heightened geopolitical/tariff risks are weighing on short-term stability for US and European enterprises. Sentiment has turned cautious from January to March, with enterprises adopting a wait-and-watch approach," Motilal Oswal said in a report.

"While GenAI adoption is progressing, it is not yet moving the needle for IT services revenues. The focus has yet to shift away from capex, and clients are still not prioritizing services spending," the brokerage firm said.

While the last earnings season showed some signs of recovery in discretionary spending, there seems to be a reversal of trend.

Infosys CFO Jayesh Sanghrajka said during the Q3 earnings that, "We are seeing some signs of recovery in discretionary spend in the Retail and CPG vertical in the US. There is a pickup in deal activity backed by improved consumer sentiment and strong holiday season sales…Communication sector continues to face volatile macro environment, leading to growth challenges and rising Opex pressure. Discretionary spending continues to be soft and current year growth is driven mainly by recent large deal wins focused on efficiency and consolidation."

Wipro CEO Srini Pallia cautioned during the last earnings that while discretionary spending in the BFSI segment in Americas is showing positive signs, it is not a secular trend yet.

Based on the current trends, Motilal Oswal has repositioned its ratings by downgrading Infosys to 'Neutral' and Wipro to 'Sell', while upgrading TechM to 'Buy'. LTIMindtree and TCS remain preferred picks for their risk-reward balance, whereas HCL's all-weather portfolio makes it relatively resilient.

"We also trim our growth estimates and reduce target multiples by 15 per cent. Among midcaps, we retain our preference for growth-oriented mid-tier names, Coforge and Persistent, and see the recent correction as an opportunity to buy. We downgrade LTTS to Neutral due to valuation discomfort," the report said.

Recent management comments from EPAM Systems, Globant, and Endava have dampened hopes for a swift recovery in discretionary spending during the first half of CY25 in contrast to the brokerage firm's earlier expectations.

"Clients are likely adopting a wait-and-watch approach as the new US administration's stance on tariffs, along with lingering geopolitical tensions, adds to the volatility and could take time to stabilize. While not yet apparent in earnings downgrades, we keep an eye out on earnings estimates for major US sectors," the report said.

Motilal Oswal believes market expectations of 5-6 per cent constant currency growth for Infosys could be at risk, while TCS is seen coming in lower at about 3.5 per cent. Wipro and Infosys face correction risk, leading the firm to downgrade its rating to 'Hold' for Infosys and 'Sell' for Wipro.