Why avoid the IT sector despite huge returns?

 As of July 7, 2025, the Nifty IT Index has a YTD return of -10.17%, indicating a decline in value since the start of the year. This underperformance is attributed to concerns over AI disruption and economic uncertainties in key markets like the U.S. Is the IT sector under turbulence, and should one avoid the sector for investments?  

The Nifty IT Index has faced a tough 2025, with a YTD decline of -10.17% as of July 7, 2025, driven by AI disruption, FII selloffs, and U.S. economic uncertainties. However, recent gains (e.g., 19.17% over three months) and optimism around Q1 earnings and trade deals suggest potential for recovery.

Where is the issue in the sector?

Advancements in artificial intelligence (AI) and automation are reducing the need for human labour in certain IT roles, particularly in repetitive or low-skill tasks such as basic coding, testing, and IT support.  Roles like entry-level software development or IT operations may face reduced demand, potentially leading to job cuts or stagnant wages in these areas. This could make the sector less appealing for new entrants or those in traditional IT roles. AI and automation are also creating new opportunities in specialised areas, such as AI/ML development, data science, and AI ethics.

The rise of AI and automation (e.g., tools like ChatGPT, Gemini, and Copilot) is reducing demand for traditional IT services like basic coding and testing, potentially affecting order volumes in these areas. A Harvard Business Review study suggests up to 30% of jobs in coding could be impacted by AI by 2030.

Demand for these roles is projected to surge by 30-35% in 2025, particularly in India. The dynamics of the Industry are changing fast, and hence, the growth prospects of the Industry during this transition phase should be avoided.

The IT sector, particularly in services, is experiencing market saturation as more companies and countries (e.g., the Philippines, China, and Costa Rica) compete for outsourcing contracts. This reduces profitability for established players and creates pricing pressure. For businesses, this could mean lower margins and reduced growth potential, making IT services less attractive to investors. 

For employees, it may lead to wage suppression in certain segments. Macroeconomic challenges, such as potential U.S. policy changes (e.g., tariffs under a new administration) and global slowdowns, could reduce IT spending, particularly in discretionary projects. Reduced client spending could lead to fewer projects and layoffs, particularly in IT services. Investors may see IT stocks underperform, as noted with a 27-30% correction in major Indian IT companies like TCS and Infosys.

 Layoff Landscape: January–July 2025

Total Job Losses:

• At least 76,000 confirmed layoffs in tech by June 2025
• Estimated 100,000+ jobs lost globally, including non-tech roles
• Peak months: February (16,234 layoffs) and April (23,400 layoffs)

🏢 Major Company Layoffs:

• Intel: Up to 25,000 job cuts—almost 20% of the workforce—mainly in the Foundry division. Further layoffs in sales and marketing began in July.
• Microsoft: 9,100 jobs cut in July, primarily in Xbox and gaming. Combined with earlier cuts in May (6,000 roles), total layoffs affected 7% of its workforce.
• Amazon: Cut around 14,000 managerial roles globally. Additional roles were slashed in its Devices & Services, Alexa, and Books (Kindle, Goodreads) divisions.
• Meta: Eliminated 3,600 positions (5% of the workforce), targeting low performers in Facebook, Horizon VR, and logistics.
• Google: Cut around 200 jobs in global business teams. Layoffs extended to Android, Pixel, Chrome, HR, and Cloud, especially in roles replaced by AI.
• IBM: Let go of approximately 8,000 employees, primarily in HR, with AI systems automating many repetitive functions.

 🌍 Regional Impact

• United States: States like California, Arizona, and Oregon have seen the highest concentration of job losses.
• Germany: Intel’s closure of its automotive chip unit impacted hundreds of jobs.
• Canada: Several tech firms downsized amid weaker capital inflows and economic strain.

Despite widespread layoffs, hiring remains strong in future-focused domains. Roles in AI, machine learning, cybersecurity, and data analytics are in demand, with job growth projected at 15–20% in these areas for 2025.

In India, fresher hiring in the IT sector is expected to rise 30–35%, particularly in positions related to cloud infrastructure, AI engineering, data science, and blockchain. The negative YTD return reflects fears of AI replacing traditional IT roles. For investors or professionals, focusing on companies and roles in high-demand areas like AI, cybersecurity, and cloud computing can mitigate risks associated with any perceived order slowdowns