A dramatic style reversal! The global AI chip market cools down, while India's IT sector surges 16% this month

According to Zhitong Finance APP, the Indian software sector is poised to record the largest monthly excess returns over the global chip sector in history, indicating that investors are selling off artificial intelligence (AI)-related stocks and turning towards previously battered information technology stocks. The NSE Nifty IT Index, composed of 10 Indian software export enterprises, has risen 16% this month, while the MSCI Global Semiconductor & Semiconductor Equipment Index has fallen 13% over the same period.

This divergence suggests that investors are growing weary of the AI-driven chip stock rally, while renewed interest is emerging in Indian IT service providers after a prolonged downturn. This shift comes as South Korea’s KOSPI index has dropped over 30% from its mid-June peak, with the index seen as a bellwether for the global semiconductor and AI sectors. Last week, Jefferies upgraded its rating on the Indian IT sector to “Neutral” and stated that the fading AI momentum is likely to bring a temporary rebound for the sector.

Indian Software Makers Outperform Global Semiconductor Stocks

On Tuesday, shares in Infosys and Tata Consultancy Services led Asian software stocks, both gaining over 3%. Chinese and Australian peers also saw increases.

Meanwhile, global chip stocks suffered a “Black Tuesday” due to doubts over AI capital expenditure returns, lingering concerns about Nvidia’s “circular financing,” and increasing competition in China’s memory chip sector. South Korea’s Kospi Index plunged 10.76%, marking its largest single-day drop since 1998, with SK Hynix plummeting 14% and Samsung Electronics dropping 13.58%; the Nikkei 225 Index closed down 4%, and Kioxia fell 18%.

Notably, signs of unwinding have appeared in the “buy chips, sell software” crowded trade in the US stock market. The iShares Expanded Tech-Software Sector ETF edged up just 0.3% this month, while the Philadelphia Semiconductor Index tumbled 19% over the same period.

Recently, positive sentiment towards software stocks has been growing on Wall Street. Guggenheim upgraded ratings for three software companies—Salesforce (CRM.US), ServiceNow (NOW.US), and Check Point (CHKP.US)—noting that, while AI may bring disruptive impacts, earlier predictions of the industry’s demise are “simply absurd.” HSBC raised Adobe’s (ADBE.US) rating from “Hold” to “Buy,” stating that “the market has overestimated the negative impact of AI design tools.”