A punishing, multi-month bear market has erased ₹17.6 lakh crore in combined market capitalization from India's top 10 digital and technology services exporters, pushing valuations to levels not seen since the global financial crisis. Driven by systemic concerns over generative artificial intelligence, weak discretionary spending, and muted earnings growth, the Nifty IT index plummeted from its cycle peak of 46,089 on December 13, 2024, to a low of 27,078 on May 14, 2026.IT sector bellwether Tata Consultancy Services (TCS) alone shed more than ₹8 lakh crore in value as its shares crashed 50%. Infosys plunged 45%, while HCL Technologies and LTIMindtree dropped at least 40%. Wipro, Mphasis, and Coforge capitulated by over 30%, with all other index constituents falling by at least 25%. After shedding 20% in February and 5% in March, the Nifty IT index has shown signs of stabilization, managing a 1% gain in April before losing 1% so far in May.Also Read | 15 stocks most vulnerable to FII selling as DIIs refuse to step inThe contrarian case buildsThe collapse has driven the sector's weight in mutual fund portfolios to an eight-year low of 6.7% in April, a level of institutional abandonment that is itself becoming a signal for contrarians. PPFAS Mutual Fund, led by veteran fund manager Rajeev Thakkar, is among the rare houses moving against the tide, raising its technology weighting by 1.2 percentage points to 12.2% in April.At the Groww India Investor Festival 2026 in Mumbai, Sankaran Naren of ICICI Prudential Mutual Fund recently described the current setup in the IT sector as "a contrarian valuation call," while acknowledging that genuine disruption risks from AI remain very much in play.Nuvama's Vibhor Singhal strikes a similarly cautious but constructive tone. He notes that Q4 FY26 results were stable, with mid-cap IT players once again outpacing their larger peers on growth. Deal wins remained healthy across most names, though companies continued to flag longer client decision-making cycles. "After the recent sharp correction, we find valuations highly attractive," Singhal wrote. "Reverse DCF analysis points to extremely low terminal growth assumptions. We remain positive on the sector from a medium to long-term perspective — in the near term, expect volatility to persist."Singhal also draws a historical parallel. "IT stocks are now reacting more to AI developments around the world than to their fundamentals and performances," he says. "We see the current scepticism as a repeat of previous tech cycles — 2016–17 being the most recent one — and expect Indian IT companies to rebound as Gen AI proliferation increases."Also Read | Is your mutual fund SIP secretly crushing the Indian rupee? Jefferies explains the bitter side of the storyThe AI disruption questionThe bear case rests on a structural anxiety: that generative AI will hollow out the traditional Indian IT delivery model, which has for decades relied on labour arbitrage and scale. Siddhartha Tipnis, Partner and Technology Sector Leader at Deloitte India, argues that three converging forces are now reshaping the competitive landscape. Frontier AI firms are moving up the value chain through lab-owned deployment organisations staffed by Forward Deployed Engineers, bringing implementation capability closer to the model layer itself. AI is simultaneously eroding the economics of the traditional delivery pyramid. And enterprise clients are progressively shifting procurement behaviour from "people supplied" toward "outcomes delivered" — accelerating movement toward value-based and consumption-oriented pricing.The implication, Tipnis says, is that AI should be viewed not merely as a productivity tool but as a fundamental redesign of the professional services business model itself. Roles concentrated in commodity execution like junior application development, QA and testing, L1/L2 support and transaction-oriented delivery face rising automation exposure and pricing pressure. The dominant delivery construct may be transitioning from large hierarchical execution factories toward smaller, multidisciplinary deployment units. Future competitive advantage, he argues, may derive less from labour scale and more from deployment capability, reusable workflow IP, and ownership of AI-enabled operating systems.Near-term pain, longer-term opportunityNuvama's Singhal does not deny the disruption. He acknowledges that IT services firms are currently facing cannibalisation of revenue from generative AI but argues this precedes an inflection point, beyond which the total addressable market could expand to $300–400 billion by 2030. The critical observation: the requirement for a system integrator capable of customising enterprise software inputs and outputs will persist regardless of how AI evolves. There is, in his assessment, no existential threat but only a painful transition.IT stocks have shown sensitivity to rupee depreciation as a weaker currency lifts the rupee value of dollar-denominated revenues. Besides, compelling valuations have also attracted short-covering. But a sustained re-rating will likely require clarity on the AI revenue impact and signs of a recovery in global discretionary technology spending.For now, the sector sits at a crossroads: valuations at generational lows, institutional ownership at an eight-year trough, and a handful of contrarians quietly accumulating even as the AI disruption narrative shows no sign of fading.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)