Indian IT stocks rebounded sharply in early trade, with the Nifty IT index gaining around 4 percent and snapping a six day losing streak. Infosys, TCS, HCL Technologies and Wipro advanced between 2 percent and 5 percent as concerns over the rapid pace of artificial intelligence development triggered a sell off in AI linked stocks globally.

The latest concerns emerged after Anthropic CEO Dario Amodei called for a slowdown in the development of frontier AI models, warning that technological progress was advancing faster than safety measures could keep pace. OpenAI CEO Sam Altman and other technology leaders have also backed calls for greater caution. The comments weighed on global AI related stocks, with semiconductor companies among the biggest casualties.

The developments provided near term support to Indian IT stocks as investors assessed whether a moderation in the pace of AI innovation could reduce the disruption risk for traditional IT services. Pankaj Pandey, Head of Retail Research at ICICI Direct, said slower innovation could give Indian IT companies more time to implement AI solutions across enterprises. He noted that continued rapid innovation could intensify deflationary pressure on IT services, while a moderation in the pace could be marginally positive for the sector.

Pandey also sees relatively better opportunities among tier two IT companies, arguing that large tier one firms may deliver only around 3 percent to 4 percent dollar revenue growth. Limited currency support could further constrain the growth outlook for larger companies, potentially giving smaller IT firms greater scope to benefit from AI related implementation spending.

Rakesh Vyas, CIO and Portfolio Manager, also sees opportunities following the significant correction in IT stocks over recent months. He highlighted the increasing adoption of outcome based pricing models, which could allow IT companies to capture greater value as enterprises move from AI experimentation towards broader deployment. Companies that adapt quickly to AI and have lower dependence on legacy technology systems could be better positioned, he added.

However, some investors remain cautious despite the decline in valuations. Alok Agarwal, CIO at Alchemy Capital Management, said the key attraction of Indian equities has been earnings growth, which has been lacking in the IT sector. He believes investors will need to see stronger growth and greater earnings visibility before the sector becomes more attractive. According to Agarwal, although valuations have become more reasonable following the correction, IT companies need to demonstrate higher teen earnings growth for sentiment to improve meaningfully.

The recent sell off has pushed valuations of several major IT companies below their historical averages. TCS is trading at around 15 times one year forward earnings compared with its five year historical average of 28 times. Infosys trades at around 14 times forward earnings against an average of 26 times, while Wipro trades at around 13 times compared with its historical average of 21 times. HCL Technologies trades at approximately 18 times forward earnings against a five year average of 24 times, while Tech Mahindra at around 28 times remains relatively closer to its historical valuation of 30 times.

The correction follows a strong two month rally in IT stocks after June quarter results. Infosys, Wipro, Tech Mahindra, TCS and HCL Technologies had gained between 8 percent and 25 percent as better than expected results raised hopes of a recovery in technology spending.

Brokerage sentiment has subsequently become more cautious. For Infosys, the current buy, sell and hold recommendation split stands at 29, 16 and 4, compared with 36, 13 and 2 after the March quarter. For TCS, the split has moved to 29, 14 and 5 from 35, 11 and 5 previously. HCL Technologies has also seen its buy recommendations decline to 16 from 22, while sell recommendations remain at 17.

The latest global AI concerns could therefore provide short term relief to Indian IT stocks after their recent decline. However, the longer term outlook will depend on whether Indian technology companies can convert the rapid evolution of AI from a threat to traditional services into a new source of enterprise technology spending and sustainable earnings growth.