Code Red for Indian IT: Tariffs Risk USA Inc. Profits and Tech Spending

The entire IT sector is experiencing a tariff-driven selloff, as concerns grow that trade barriers could drive up US inflation, hinder recovery in discretionary spending, and possibly trigger a recession. Major IT stocks like TCS and Infosys, along with midcap companies, have fallen sharply amid fears that US clients may reduce tech spending, impacting revenue growth for Indian IT firms.

Is a Profit Squeeze Looming if US Tech Spend Slows?

Market expert Sunil Subramaniam suggests that the decline in IT stocks is fueled by more than just general recession concerns. In an interview with Moneycontrol, Subramaniam pointed out US President Trump's warning to American businesses not to pass tariff costs onto consumers, placing added pressure on companies that depend on imported raw materials and semi-finished goods. With profit margins at risk, Subramaniam warned that US companies may look to cut costs in other areas, potentially delaying IT spending.

“The real concern is not just the broader US recession but the impact on corporate earnings in the US. If American firms see their profits shrink because they cannot pass on tariff-related costs, they might push IT expenditures to the back burner,” Sunil Subramaniam said.

Interest Rate Cuts and Currency Impact

Another factor putting pressure on IT stocks is the expected rate cut by the US Federal Reserve. Sunil Subramaniam noted that the likelihood of a Fed rate cut has risen to 70%, a move that could weaken the dollar and, in turn, impact the earnings of Indian IT companies.

“In the past, a stronger dollar and a weaker rupee acted as tailwinds for Indian IT companies, boosting their earnings in rupee terms. However, with the dollar likely to weaken, this advantage is fading,” he added.

Relief for IT Services, but Uncertainty Persists

Although tariffs on services, a major concern for Indian IT companies, have not been imposed, Sunil Subramaniam is advising investors to stay cautious and monitor how US corporations adapt to the new trade landscape before making any investment decisions.

“There was a fear that tariffs might be imposed on services, but that hasn’t happened. This is a positive sign. However, we still need to see how American firms will navigate this situation—whether they absorb costs or pass them on in some other way,” Sunil added.

Earnings Season Holds the Key

With earnings season approaching, Sunil Subramaniam has advised investors to closely monitor IT companies’ guidance and client spending patterns. "The real clarity will come from the IT firms themselves. Their earnings reports and analyst calls will provide a clearer picture of how their US clients are responding to the economic situation. Until then, it’s best to take a wait-and-watch approach," Subramaniam said.

Although there are no immediate threats of tariffs on services, the combined effects of US recession fears, shrinking corporate margins, and potential delays in IT spending suggest that Indian IT may face short-term challenges, leading Subramaniam to recommend a cautious wait-and-watch strategy for IT stocks.