TCS, Wipro & Infosys saw a massive selloff after Walmart & Target’s revenues fell — explaining the domino effect

• IT giant Wipro fell to its 1-year low followed by sharp fall in other IT stocks.
• Reportedly, US-based investment banker JP Morgan has downgraded its rating on TCS, HCL Tech, Wipro, L&T Tech to ‘underweight’ from ‘neutral’ on potential macro slowdown.
• Indian stocks mirrored its global peers today that fell sharply as large retail giants like Walmart, Target delivered disappointing earnings.

Azim Premji owned Wipro fell by 5.7% on May 19 to touch its lowest point yet in a year. HCL and Infosys too fell closer to their 52-week lows and TCS and Tech Mahindra too are racing towards it.

All this is an after effect of the massive selloff in the US markets - which is where most of our tech majors’ revenues come from. The American stock markets fell after its top retailers Walmart and Target reported poor earnings indicating pain in the economy.

“The American retail majors Walmart and Target have disappointed on the Q1 earnings front, indicating that even large companies are unable to cope with the supply chain and inflationary woes. This has created a huge sell-off and meltdown in the majority of the stock markets globally. India's WPI inflation jumped to a 17-year high, this will force RBI to further hike interest rates,” said Parth Nyati, Founder, Tradingo.

Recently, Goldman Sachs CEO David Solomon told CNBC that there is a reasonable chance that the US may head into a recession while he urges caution for big businesses.

“US markets saw the worst sell off since June 2020 as inflation fear looms. A day before Walmart posted its results and pruned its earning forecast. The Indian economy is set to face jitters due to rising inflation in the US thus, making further interest rate hikes all the more important,” said Mohit Nigam, head - PMS at Hem Securities.

Margin headwinds for the Indian IT majors ahead

JP Morgan has reportedly downgraded its ratings on TCS, HCL Tech, Wipro, L&T Tech to ‘underweight’ from ‘neutral’ on potential macro slowdown.

According to the brokerage firm, the sector would face rising margin headwinds in the near term and revenue headwinds in the medium term from a potential macro slowdown. It means that the sector’s earnings upgrade cycle is behind it.

The IT stock fall today mirrored that of its global peers in the US market - which saw the biggest fall in almost two years. Amazon, Tesla, Apple, Alphabet, Microsoft too fell by over 1-2%.

From being the top gainers last year to now top losers, IT firms have seen the worst of all

The domino effect of inflation to economy to IT spends
There are enough reasons for investors to believe in a massive economic slowdown and a potential recession as prices of commodities spiked sharply in the last few months. While the situation was bad after the pandemic, the Russia-Ukraine war hammered it even more.

The war led to rise in crude oil prices, essential food items, fuel, electricity etc. High inflation leads to poor demand thereby impacting the profitability of large companies.

Inflation is at a 40-year high in countries like the UK, and US. “Global inflation has become the biggest spoilsport and has derailed the economic growth recovery globally,” said Nyati.

In an ideal situation, the fall in Rupee value against the Dollar should be good news for IT firms which earn in Dollar. But this too gave no cushion for the stocks as investors seem to believe that would earn too little in the first place.

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