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Domestic equity markets have been pulled in opposite directions this February by their two most influential sectors. Rising worries about artificial intelligence (AI) disrupting business models have hurt investor confidence in the information technology (IT) sector, weakening its performance. At the same time, banking, financial services and insurance (BFSI) companies have reported strong earnings, helping support the broader market and reshaping corporate profit mix.

A Mint analysis of latest earnings shows that the IT sector’s share of the overall corporate profit pool slipped to at least a three-year low of 9% in the October-December-quarter (Q3FY26). It fell from nearly 12% in Q4FY22, and significantly lower than the pandemic-era peak of 34% in June 2020, when IT rode the digital adoption wave. Over the same period, BFSI’s contribution climbed to a three-year high of 45%, up sharply from 30% in the March quarter of FY22.

This shift matters for the market. IT, at roughly 9% weight, remains the second-largest sector in the benchmark Nifty 50 index, while BFSI dominates with about 37% weight. In theory, BFSI’s expanding profit share and heavier index presence should have cushioned broader market weakness. In practice, however, IT’s slide has exerted an outsized drag on the market.

Analysts say this reflects the market’s current fixation on IT’s uncertainty, particularly around AI-led disruption. Jefferies described the recent slide in global technology stocks as a “shoot first and ask questions later” reaction, underscoring how sentiment has turned increasingly brittle across software names worldwide.

The performance gap underscores this tension. While the Nifty 50 has gained about 14% in the past year, the Nifty IT Index has slid nearly 20%, turning IT into the market’s weakest link.

Large-cap IT stocks mirror this weakness. Shares of Tata Consultancy Services (TCS) and Infosys have declined about 20% year-to-date, dragging the broader IT index down roughly 17%. The weakness follows aggressive foreign investor selling. Foreign investors have sold nearly ₹11,000 crore worth of IT stocks in the first two weeks of February. As a result, the benchmark index is down nearly 2% so far this year.

The latest leg of IT selling was triggered in early February following a disruption narrative linked to Anthropic. The AI research firm rolled out 11 enterprise-grade plug-ins for its Claude Cowork platform, signalling a perceived shift in generative AI’s role. Markets increasingly see it as a task-replacement engine rather than merely a productivity enhancer.

These AI agents, designed to autonomously navigate datasets and execute higher-order functions such as contract reviews, financial diligence, and automated reporting, intensified concerns that AI could compress demand for traditional IT services.

“As productivity improves, clients will demand a share of the efficiency gains. This could compress billing rates and reduce realizations per man-hour,” Sumit Pokharna, IT analyst at Kotak Securities said. “Work volumes may rise, but not enough to fully offset the pricing pressure.”

With fewer engineers needed to perform tasks that once required larger teams, experts warn that the industry’s man-hour billing model could come under pressure, raising the risk of revenue deflation.

Pokharna argues that while the fears are not entirely misplaced, the market’s reaction may be running ahead of operational reality. He emphasized that AI adoption will likely be gradual rather than abrupt. But right now, “uncertainty is killing sentiment in IT," he added.

Moreover, most enterprises continue to operate on legacy technology systems, Seshadri Sen, head of research at Emkay Global Financial Services, pointed out. He argued that meaningful gains from AI adoption will require companies to first modernize their technology stacks—a transition that still depends heavily on traditional IT services.

“AI will certainly disrupt IT services. But it will not render them obsolete,” Sen said. He sees the sector transitioning into a lower-growth, high-cash-flow segment, akin to defensives like fast-moving consumer goods (FMCG) or utilities.

“This is unlikely to be a 15% growth industry anymore. Growth may settle in the 0-5% range,” Sen added. “At these valuations, IT is less a buy-and-hold compounding story and more a valuation-driven trade.”

To be sure, IT’s troubles run deeper than near-term AI anxieties. A structural shift in client spending toward hyperscalers, SaaS (Software as a Service) and automation has slowed revenue realizations, made large deals rarer, and eroded the sector's contribution to India Inc’s profit pool in the last three years.

Kotak Institutional Equities now expects AI-led disruptions to shave 2-3% off the IT's growth over the next two years. But the brokerage also noted that at current valuations, the market appears to be discounting a disruption-only scenario, implying little to no growth visibility for IT services companies. Analysts argue that such pricing may overlook emerging opportunities in AI integration, orchestration and governance, where IT firms could reposition themselves as AI ecosystem managers of their clients.

Even as uncertainty clouds IT, BFSI has become the market’s zone of clarity.

The BFSI segment outpaced both broader India Inc and the non-BFSI pack in revenue and profit growth. Sectoral revenue rose 14.5% year-on-year in Q3—the fastest in six quarters—while profits grew at a similar pace, aided by stronger credit growth and moderating credit costs. This pushed the sector’s contribution to corporate profit pool to a three-year high.

This strength is evident in market performance too. The FINNIFTY, which tracks the top 20 financial stocks, has returned 3% year-to-date, and 24% over the past year, strongly outperforming the benchmark index.

Foreign portfolio investors have reinforced this trend, buying nearly ₹6,200 crore worth of financial stocks during February’s volatility, making BFSI the sector with the second-highest inflows after capital goods, National Securities Depository Ltd (NSDL) data showed.

Among the beneficiaries, the State Bank of India stood out. Its stock has risen nearly 25% so far this year, overtaking TCS to become the country’s fourth-largest company by market capitalization.

SBI’s rally highlights the recent resurgence in public sector banks, supported by healthier credit growth and benign credit costs, noted experts. The Nifty PSU Bank index has gained 15% year-to-date and is up nearly 50% over the past year.

According to Axis Securities, public sector banks reported stronger credit growth than their private peers in the December quarter, supported by their higher exposure to corporate and micro, small and medium segments, where loan demand remained robust.

Yet, Emkay Global’s Sen cautioned that at current valuations, PSU banks’ outperformance may face sustainability tests.

Santanu Chakrabarti, banking and financials analyst at BNP Paribas, noted that while PSU banks have reported strong growth, their earnings have also been supported by unusually low credit costs, partly because they drew down provisions set aside for legacy stressed loans.

“With credit costs likely to normalize, maintaining profitability will require margins, funding growth and cost efficiency to remain well aligned,” Chakrabarti said. “Sustaining the recent outperformance will be more challenging for PSU banks from here.”

At this stage, Chakrabarti prefers large private banks, pointing to their cheaper valuations, stronger deposit growth, higher share of low-cost Casa (current account savings account) deposits, and more durable margin visibility.

He expects systemic credit growth of around 13% to remain intact for FY27, with most large private banks likely to outpace the system by 100-200 basis points. “Gradual margin expansion through FY27 can support earnings growth of 20% for private banks in the next fiscal,” Chakrabarti added.

Experts are clearly bullish on BFSI, but the market’s central dilemma remains: can financials counterbalance a prolonged IT slowdown?

For now, the December-quarter data offers a sobering reminder—uncertainty can outweigh even robust earnings contributions and heavier index weights.

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