The market has no clear direction; Largecaps favorite, AI wave brings risks for IT: Anand Tandon

With global macro risks rising and the Indian rupee weakening, equity markets are likely to remain within their range in the near term, says Anand Tandon, independent analyst. Speaking to ET Now, Tandon said he is taking a cautious stance as the market lacks clear triggers, earnings remain mixed and global developments – especially interest rate trends in Japan – pose new risks to capital flows.“There is no decisive trend. The sideways movement has been long-lasting, and global macroeconomic concerns – especially the possibility of a reversal in Japan’s carry trade – could put further pressure on emerging markets,” he said. A sharply weaker rupee, he added, has eroded foreign investors’ returns. “As the cost of capital rises abroad, FIIs have even less incentive to stay invested.”

He also signaled a muted outlook on earnings and the absence of near-term catalysts such as a US-India trade deal, which he doesn’t expect “soon.”

Large caps are clearly better positioned than the broader market

Tandon believes that the risk-reward ratio is much higher in large caps, driven by global themes such as metals, energy and AI, where larger companies dominate project execution and capital availability.

“In India too, government-led projects disproportionately benefit large caps. Consumer optimism is already priced in, and there is little value outside the high end,” he noted.

While there are opportunities in small caps, he doesn’t see a viable long-term strategy in chasing names in broader markets. “You might find 10 to 20 interesting stocks, but not enough to build a consistent strategy.”

IT sector: margins can improve, but AI is a structural threat

The recent weakness of the rupee initially boosted IT stocks, but the sector is under pressure again. Tandon sees a deeper structural problem emerging from the global shift to AI. “As AI use cases expand, Indian IT becomes a counter and not a beneficiary. AI working well means IT’s traditional services model is weakened,” he said.

He pointed to Microsoft’s announcement to train 2 crore Indians in AI, compared to an existing IT workforce of around 50 lakh. “Either the figure is unrealistic, or it implies a massive reskilling outside of traditional IT. In either scenario, demand for India’s traditional IT services will be under pressure.”

While margins could improve for those who remain in the sector, he warned that workforce growth – historically the backbone of India’s IT revenues – will not keep pace. “Our model of people multiplied by dollars per hour is not sustainable in an AI-powered world,” he said.

Outlook: Stay in large caps, be selective in IT, avoid aggressive positioning

• Large caps remain the preferred space for all themes.
• Small caps lack consistent structural justification in the current environment.
• IT may deliver short-term margins, but faces long-term disruption risks from AI.
• Without strong catalysts, the market’s direction is likely to remain uncertain.