As AI reshapes the tech landscape, investors may consider diversifying their portfolios beyond traditional IT stocks. Experts emphasise a balanced approach that includes AI enablers and U.S. tech giants, while also preparing for potential volatility in the sector. 

Technology stocks worldwide are experiencing sharp volatility amid concerns over rapid advancements in artificial intelligence (AI) and their potential impact on the broader IT sector.

The Nifty IT index is down 20% so far in February, with stocks like TCS, Infosys, Tech Mahindra, HCL Tech, and Coforge falling 15-25%, amid concerns that AI may render traditional outsourcing services redundant. This is because AI can now write code, deploy systems faster and more efficiently, and even fix bugs.

For example, Anthropic’s Claude Code has reportedly shown that AI can automate tasks such as contract review, code testing, and modernising COBOL — an old programming language used on IBM systems. It can analyse thousands of lines of legacy code, identify dependencies, and flag potential risks in a fraction of the time it would take human analysts, who might need months to do the same work.

“These are not peripheral IT tasks. They are the core services Indian IT has billed hundreds of billions of dollars for over three decades,” Subho Moulik, the founder and CEO of Appreciate, pointed out.

However, there are other factors too behind the selloff in the sector.

As Ravi Singh, Chief Research Officer at Master Capital Services, pointed out that the recent weakness in Indian IT stocks is not about a single blow-up, but a combination of macro worries, earnings risk and a sudden shift in the AI narrative.

“The sector is still heavily dependent on the US and Europe, and lingering doubts about their growth outlook, slower-than-hoped Fed rate cuts and more cautious IT budgets are all showing up in softer deal flow and delayed decisions,” Singh said.

While it is widely accepted that artificial intelligence (AI) will significantly disrupt the technology sector and many others, the real debate centres on the scale of that disruption and the speed at which it will unfold.

Will AI replace traditional IT services?

IT is not the only sector that will be tremendously impacted by AI-led disruptions. Several other sectors, such as healthcare, education, and entertainment, appear to be on the cusp of witnessing major disruption due to artificial intelligence.

But the noise over AI appears to be more pronounced in the technology sector. Some experts say a major disruption in the sector could be just a few months away, while several others say concerns over AI’s impact on the IT sector are overblown.

The Indian IT industry body NASSCOM believes the Indian IT sector’s revenue may surpass $300 billion for the first time in FY26 and the trend may remain similar in the upcoming financial year, according to Reuters.

NASSCOM expects the IT sector to grow 6.1% year-on-year to $315 billion in FY26, even as it underscored that while AI is compressing traditional work, it is expanding other areas of work.

Global financial firm HSBC believes AI will not kill the software industry, and rather, AI will be embedded within software platforms. HSBC said AI is destined to be subordinate to the overall software platform.

The debate is far from settled. While it is premature to reach a definitive conclusion, most analysts believe the sector is headed for transformation, not termination.

“The volatility in the IT sector reflects a pricing reset, not structural impairment. Markets are discounting pressure on legacy models before AI-led monetisation becomes visible,” Meeta Shetty, Fund Manager, Tata Asset Management, observed.

Shetty underscored that with 60–80% of enterprise IT budgets still locked in maintenance, AI-driven modernisation creates a structural opportunity. Earnings revisions have stabilised, and valuations remain within a reasonable band, limiting downside risk.

What should be in your tech portfolio?

A prudent investor may not want to go big on traditional IT stocks at this juncture. Given the current volatility, a diversified approach would make more sense.

“While incremental downside risk remains in the near term, the sector does not exhibit structural impairment. Rather than committing a large sum at once, it makes sense to add to positions gradually on pullbacks and wait for clear signs of earnings momentum before increasing exposure,” said Singh.

According to Singh, long-term investors who accept 12–24 months of execution risk can begin to accumulate selectively in market leaders that combine strong balance sheets, diversified revenue streams, cloud and hyperscaler partnerships, and demonstrable AI monetisation plans.

“Given expectations of a gradual recovery, over-concentration in traditional IT may not be prudent. A diversified exposure across the broader digital ecosystem, including non-IT digital plays and AI-linked infrastructure, better captures the service-led AI cycle. A minimum three-year horizon is essential to ride execution-led volatility,” said Shetty.

Shetty underscored that the first phase of the AI rally was hardware-led and dominated by global technology majors. The next phase could be service-led AI deployment and enterprise modernisation.

However, a pertinent question that investors are grappling with is whether, instead of investing solely in IT companies, they should allocate capital to large U.S. tech stocks, such as Nvidia, Alphabet, and Microsoft.

Shetty said India is positioned to participate meaningfully in this transition. Therefore, this is not an either-or decision; the structural opportunity is now shifting toward execution, modernisation and infrastructure-led growth, where Indian players remain relevant.

Ross Maxwell, Global Strategy Operations Lead for VT Markets, highlighted that AI is creating a clear divide within the IT sector rather than boosting all firms equally.

“Companies that own cloud infrastructure, chips, data, and scalable software platforms are seeing strong performance because AI increases their pricing power. However, traditional IT services firms face revenue pressure as automation reduces hours and clients are focused on operational efficiency,” Maxwell noted.

Maxwell believes that, in the long term, the market is likely to reward business models where revenue scales faster than costs. A reasonable tech portfolio should therefore be layered.

“The core allocation can be focused on AI enablers, those with strong cloud, semiconductors, cybersecurity, and data platforms. A secondary allocation can target high-growth software firms embedding AI into workflows. A smaller allocation can go to services companies that are successfully shifting toward platform, and outcome-based pricing,” said Maxwell.

According to Maxwell, owning large US tech stocks can be justified because they dominate global distribution, making them primary beneficiaries of AI capital expenditure.

However, Maxwell added that overexposure leaves investors open to valuation issues and concentration risk, so position sizing, staggered buying, and regular reviews with rebalancing are essential.

Appreciate’s CEO believes the market is treating a nuanced story like a blunt instrument. That is exactly where the opportunity lies for investors who do their homework.

“Ask three questions about any Indian IT stock right now: What share of their revenue is pure application services? Above 60% is high risk, and around or below 40% is a different conversation entirely. Are they building proprietary AI platforms or still exploring AI? Have they moved to outcome-based billing, or are they still on hourly models? Those three answers separate the survivors from the bleedouts. The market is not making that distinction today. Eventually it will,” said Moulik.

Moulik underscored that AI returns do not all arrive at once.

The earliest beneficiaries were the infrastructure builders, i.e., the chip makers, the data centre operators, and the cloud platforms scaling to meet demand. That wave is already in earnings.

What is still underpriced, according to Moulik, is the application laye,r which takes longer and has more risk attached to it related to timing and absorption/execution.

Moulik says Indian investors building US tech positions should consider how AI shifts the economics of advertising for platforms like Meta and Google, and how it compresses operating costs across banking, healthcare, retail, and manufacturing globally.

According to Moulik, Indian IT, at current valuations, is a recovery bet, for excessive damage that has been incorrectly priced in, not for short-term growth and earnings expansion upside. A size that positions accordingly as a satellite allocation, but is no longer core today.

“Monitor ongoing developments to assess when a change in allocation may be required based on which Indian IT players are recovering strongly and which players are not,” Moulik said.

According to Moulik, both Indian IT and US tech giants belong in a well-constructed portfolio. But the weights should reflect reality.

“US Tech is where earnings are compounding, where the AI buildout is being monetised directly, and where Indian retail investors remain most underexposed. The window to build that exposure at palatable valuations is open right now. It will not stay open indefinitely,” said Moulik.

According to Mohar V, co-founder and CEO of TECHVED Consulting, it is more about understanding exposure to AI-driven growth.

A balanced portfolio that includes companies seriously building AI capabilities, whether in technology infrastructure, platforms, or services, is wiser than reacting to short-term market ups and downs. Big shifts like this require patience and a long-term vision, Mohar said.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not sharechart. We advise investors to consult with certified experts before making any investment decisions.