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The artificial intelligence boom has propelled US technology stocks to historic highs, while India’s IT services sector is struggling to keep pace, slipping into one of its weakest relative phases since 2023.

On a rolling three-year basis, the Nifty IT index is now underperforming its US technology peers in the Nasdaq by over 40%. The US tech-heavy index has outperformed India’s Nifty IT since mid-2023—when the AI frenzy began—according to an analysis by DSP Asset Managers.

Indian IT has seen periods of relative weakness against global peers before, but analysts say what sets the current cycle apart is that the gap is being driven less by currency movements or outsourcing demand, and more by who controls the AI value chain.

During the late-1990s tech boom, Indian IT strongly outperformed, with a relative rolling three-year gain peaking near 194% in 2000. This was followed by a sharp reversal after the dot-com crash, with underperformance widening to around 48% by 2002. Again a mid-2000s recovery faded during the global financial crisis, pushing the underperformance gap back to roughly 34%.

The pattern repeated in the next decade. After a brief outperformance of nearly 50% in the early 2010s, Indian IT slipped again by 2012–13, lagging the Nasdaq by about 49%. Underperformance remained elevated between 2015 and 2018, narrowed briefly during the pandemic, and has widened once more since mid-2023, with the rolling three-year gap returning to around 48%.

Market participants increasingly see the gap as rooted in a fundamental shift rather than a simple valuation mismatch.

“This is not just a valuation gap. It’s a fundamental gap in innovation and monetization," said Siddharth Bhamre, head of institutional research at Asit C Mehta Investment Intermediates. “US tech companies sit at the top of the value pyramid with AI. Indian IT remains largely services-led and is still in transition."

Meanwhile, growth visibility for Indian IT remains weak, he added, with large-cap companies growing just 0–3%. Recent quarterly numbers underline this caution: TCS reported a 1.6% sequential decline in Q1FY26, followed by a modest 3.7% rise in Q2, while Infosys posted quarter-on-quarter growth of 3.3% and 5.2% in the first two quarters of FY26. HCL Technologies saw growth of just 0.1% in Q1 before improving to 4.9% in Q2.

“At that pace, valuations of 21–22 times earnings are already expensive. The best case is that the gap stops widening but expecting it to close meaningfully over the next few years may be optimistic," he added further.

Bhavik Joshi, business head at INVasset PMS, also feels that the widening gap reflects a shift in what markets are rewarding rather than a simple valuation mismatch.

“Much of the Nasdaq’s outperformance has been driven by a narrow set of AI-led companies such as Nvidia and Palantir, which operate in segments with higher pricing power and stronger growth visibility."

For investors, the contrast is becoming clearer. Joshi explains, Indian IT remains closely tied to global enterprise spending cycles, offering stability but limited upside in the near term. With concentration risk in the Nasdaq rising, US technology continues to command capital because of stronger earnings visibility and platform-led growth.

“However, expecting Indian IT to mirror Nasdaq-style wealth creation may be unrealistic. The likely outcome is a narrower performance gap over time, driven by valuation discipline and diversification away from extreme concentration, rather than a full reversal of leadership," he added.

Semiconductors—the AI economy’s backbone—now define this structural divide. Nvidia’s market capitalization has surged nearly 950%, from about $408 billion in late 2022 to roughly $4.28 trillion by late 2025. Other key enablers also followed: Broadcom’s valuation rose nearly 600% to around $1.6 trillion, while ASML Holdings, critical to advanced chipmaking, climbed over 80% to about $422 billion.

The ripple effect is across US technology platforms. Microsoft’s market value has increased over 90% to approximately $3.5 trillion, driven by AI integration across its product stack. Alphabet’s valuation has more than tripled to around $3.7 trillion on expectations that AI will strengthen its core businesses. Even Apple’s market capitalization has risen to $4.05 trillion, up nearly 89%, while Cisco Systems has seen its valuation climb to $309.17 billion, a gain of around 57%.

That said, Anil Rego, founder and fund manager at Right Horizons PMS does not view the Nasdaq–Nifty IT performance gap as a permanent decoupling.

“Markets are currently assigning a structural premium to where AI economics are most visible today—US mega-cap technology companies with scale, proprietary data and distribution advantages."

He cautioned, however, that market leadership has become unusually narrow. The top 10 US companies now account for nearly 40% of the S&P 500’s market capitalisation, with the ‘Magnificent Seven’ driving over 40% of index returns.

“Much of the past three years’ outperformance has been driven by valuation expansion rather than earnings growth, making the next phase increasingly dependent on earnings delivery and cash-flow durability," Rego said.

In sharp contrast, India’s major IT services firms have delivered muted market performance since late 2022. Sector bellwether Tata Consultancy Services saw its market capitalization edge down from about ₹11.8 trillion to roughly ₹11.6 trillion, while Infosys posted modest gains, rising from around ₹6.4 trillion to ₹6.6 trillion amid a prolonged demand slowdown.

Mid-tier players fared better. HCL Technologies stood out, with its market value jumping over 60% to around ₹4.5 trillion, aided by its engineering services and software products portfolio. Wipro also saw a recovery, rising about 27% to ₹2.7 trillion, though it continues to lag peers on growth momentum.

Rego believes the sector’s re-rating potential hinges on both a cyclical recovery and successful AI monetization.

“Recent Q2FY26 trends suggest Indian IT may be nearing a demand trough, with stabilization and gradual improvement expected through CY26," he said.

More importantly, AI-first deals are likely to emerge as a tangible revenue driver from FY27 onwards, partially offsetting pricing pressure in legacy services and supporting margin improvement.

“The current gap is explainable by near-term AI concentration and visible value capture in US tech, but it is not structural or irreversible," Rego said. “As earnings delivery, capital discipline and AI monetization evolve, conditions for relative mean reversion should improve over the medium term."

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