The stock market is currently in the midst of the Q1 FY2026 earnings season, and two key sectors which often shape market sentiment – Information Technology and Retail -- find themselves at a crossroads.
According to market analysts, the retail sector maintains its momentum through consumption growth even though profit margins face challenges. There are, however, no such visible tailwinds for the IT sector during these times. Hence, such divergent earnings pressures could present selective opportunities rather than sector-wide calls.
“Geopolitical tensions and macro policy uncertainties in the sector’s major markets are compounding the challenges. The two major markets for the large IT services firms – the US and Europe- have reduced tech spending, resulting in muted growth projections of the large companies. Markets are expecting TCS to report a muted 1 per cent to 3 per cent YoY profit growth. The industry leader Infosys is projected to achieve approximately 1.4 per cent constant currency revenue growth,” says Ankit Patel, Partner and Co-founder at Arunasset Investment Services, a wealth management company.
Advertisement
Opportunities in IT Sector
However, this uncertainty is encouraging some contrarian interest. Valuations have become reasonable because of the market correction in the IT sector. Nifty IT has corrected ~10% YTD, pushing dividend yields on top-tier companies like TCS and HCL Tech to ~3.7 per cent. Such low levels have not been recorded in recent times.
Market analysts are of the view that large IT companies are on the cusp of turning around over the medium term. For example, HSBC expects sequential growth to remain flat in the near term but is highlighting the sector’s improving value proposition.
Advertisement
“What is of interest to investors is the resilience of the mid-sized IT companies. To give an example, Coforge, Persistent Systems, KPIT, and Mphasis are expected to deliver 1 per cent to 7 per cent sequential growth. Their niche digital capabilities, along with lower base and diversified client portfolios, are assisting them to buck the trend that their larger counterparts are able to. Investors can find good stories through thematic or mid-cap classified mutual funds,” says Patel.
Opportunities in Retail
The playout in the retail and consumption sectors is quite encouraging. Organised players like DMart operator Avenue Supermarkets clocked Rs 15,932 crore in Q1 sales, up 16.2 per cent YoY, propped up by expanded store footprint of 424 outlets. But, they too have their tales of woo in the form of rising cost pressures.
Advertisement
The long-term consumption story is intact. Rising urbanisation, brand penetration, and formalisation trends are the retail headwinds. Along with travel, QSRs and lifestyle brands, retail remains a fund manager’s favourite.
“Mutual fund managers’ positioning reflects a decisive tilt toward domestically-driven growth stories. Their schemes have been fortified with financials (especially NBFCs), healthcare, and consumer discretionary at the cost of IT, autos, and commodities. To give an example, schemes of Axis and Kotak Mutual Fund reflect overweight calls on retail, BSFI and pharma, which are aligned with India’s structural growth drivers. On the other hand, IT and industrials remain underweight,” informs Patel.
What Should Investors Do?
This earnings season is unlikely to warrant a course correction for personal investors of SIP (Systematic Investment Plan) into mutual fund schemes. SIP flows are strong with FY26 inflows into mutual funds projected in the range of Rs 3.3 to 3.7 lakh crore ($40 to $45 billion). This underscores the rising investor discipline in volatile markets. Thematic funds focusing on consumption, digital transformation or mid-cap and small-cap opportunities should be on the personal investor’s allocation, especially investors with a high volatility appetite and a longer time horizon.
Advertisement
“Riding deeper into FY26, the market is shifting to a selective stock picking regime rather than sectoral bets. Investors will have to dig deeper into careful and selective stock picking rather than betting on sectors. Both IT and retail offer selective opportunities. But, only through a bottom-up lens,” advises Patel.
(Disclaimer: The investment advice and recommendations in this story are those of Arunasset Investment Services and do not reflect the views of Outlook Money. Readers are advised to conduct their own research and consult a qualified financial advisor before making any investment decisions.)
