Bernstein believes early IT services earnings-season signals are broadly positive, weakening the industry's bearish narrative
AI summary card
Bernstein believes early IT services earnings-season signals are broadly positive, weakening the industry's bearish narrative
Results from about 20 companies reported so far show that although IT services demand remains pressured by weak discretionary spending, bookings, net hiring, and auto- and AI-related transformation demand remain resilient, while low valuations are starting to cushion bad news.
- This quarter, most share price reactions for reported IT services companies have fallen within -5% to +5%; even when companies such as Wipro and Tieto missed expectations, their shares did not experience sharp declines.
- Net employee hiring remains positive, weakening the 'Great Replacement' narrative that AI or automation will massively replace IT services engineers.
- Discretionary IT spending remains weak, but customer transformation demand is real, and bookings and new business metrics have delivered positive surprises at some companies.
- The report argues that the automotive sector is not as pessimistic as the market assumes; transformation, R&D, outsourcing, and supplier consolidation continue to provide opportunities for related IT services providers.
- IBM's concern that AI is crowding out spending was notably eased over the following two weeks, and IBM's services business still maintained its FY26 low- to mid-single-digit growth target.
- Ongoing M&A activity shows that the industry's long-term value is not zero; the report believes AI is more likely to drive industry evolution than to end the industry.
Report interpretation
Overview
This is a Bernstein earnings review of the first three weeks of earnings season for the European technology/software and IT services sector. The report covers results from about 20 IT services companies across Europe, India, and the United States, and evaluates industry trends from six angles: share price reactions, hiring, bookings, automotive-sector demand, AI crowding out spending, and M&A. The overall conclusion is that the current news flow supports bulls more than bears. Although short-term discretionary spending remains weak, low valuations, booking resilience, and transformation demand together weaken the bearish narrative that 'the IT services industry has no future.'
Core views
The core views are: first, earnings-day share price moves this season have been milder than in the past, suggesting that valuations for some companies already reflect extremely pessimistic scenarios; second, the industry is still hiring on a net basis, and the extreme narrative of AI replacing labor lacks data support; third, weak customer discretionary spending is a cyclical rather than structural issue, while AI-, financial services-, and transformation-related demand is still growing; fourth, the market underestimates IT services demand from the automotive sector, as European automakers and suppliers still need outsourcing, R&D, and production-process upgrades to respond to competition; fifth, there is no broad evidence that AI is crowding out IT spending, and the IBM issue looks more like a hardware/mainframe-specific problem; sixth, continued recent industry M&A shows that IT services assets still have long-term value.
Analysis framework
The report uses a cross-sectional earnings-season reading approach, triangulating reported IT services company results against market expectations, historical quarters, booking indicators, net employee hiring, vertical-industry trends, and management commentary. The focus is not on any single company's results, but on judging the industry cycle, valuation floor, and whether the AI-disruption narrative holds based on shared behavioral and financial signals across multiple companies.
Methodology notes
Judge common industry trends through reported company results, bookings, share price reactions, and management commentary.
The report uses disclosed results from Indian, European, and U.S. IT services companies as a sample and compares revenue momentum, bookings, new business, net hiring, and market reactions to infer the near-term health of the IT services industry.
When low-valuation companies stop falling sharply on bad news, it may indicate that the market has already priced in a more pessimistic scenario.
The report notes that most reported companies saw earnings-day share price reactions between -5% and +5%, with low valuations starting to cushion negative information. If 2H26 continues the resilience seen in 1H26, the most undervalued European IT services companies may see rerating.
AI may change the content and pricing structure of IT services, but it does not necessarily lead to a shrinking addressable market.
The report maintains its base case: customers want to do more with the same budget, and AI brings complexity, technology dependence, sovereignty, usage costs, and security issues, which may instead increase large enterprises' demand for external IT experts.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- European IT services companiesCore research focus
- Strengths
- Low valuations, more muted reactions to bad news, ongoing customer transformation demand, and continued M&A activity.
- Weaknesses
- Discretionary spending remains weak, and short-term revenue growth has not fully recovered.
- Comparison
- Compared with software or other technology sectors, the report argues that the risk-reward for European IT services companies is not obviously asymmetric, because starting valuations are already low.
- Risks
- If weak demand persists longer than expected, valuation recovery may be delayed.
- Indian IT services companiesReference sample for industry conditions
- Strengths
- Bookings and sequential revenue growth are broadly resilient, with relatively good booking signals from TCS, HCL, and Tech Mah.
- Weaknesses
- Wipro has the weakest booking momentum and has missed the midpoint of guidance on revenue for two consecutive quarters.
- Comparison
- The report uses earlier-reported Indian company earnings as a leading indicator for global IT services conditions.
- Risks
- Macroeconomic uncertainty and delayed discretionary projects could still weigh on growth.
- Companies exposed to automotive IT and engineering servicesPotentially undervalued theme
- Strengths
- Automakers and suppliers still need support for R&D, product planning, production-process upgrades, and cost optimization.
- Weaknesses
- European auto sector fundamentals remain under pressure, and customers such as German automakers face pricing pressure.
- Comparison
- The report argues that the market is overly pessimistic about the automotive vertical, with data points from Tata Elxsi, Tata Engineering, Randstad, and others providing counterevidence.
- Risks
- If automakers cut outsourcing budgets or delay transformation investments, the expected revenue improvement for related IT services providers may fail to materialize.
- AI-related IT services demandStructural influencing factor
- Strengths
- AI increases IT complexity for large enterprises, creating demand for integration, security, sovereignty, cost management, and ecosystem building.
- Weaknesses
- Some 'run' activities may be affected by AI-driven price deflation and automation.
- Comparison
- The report rejects the extreme view of AI as the 'Grim Reaper' of IT services, arguing that AI is more likely to drive industry evolution.
- Risks
- If AI budgets increasingly crowd out traditional IT spending, the industry's revenue mix and margins may come under pressure.
Key data
- Reported company coverageAbout 20/50 companiesThe report says preliminary conclusions can now be drawn from about 20 companies that have reported out of roughly 50 key companies under coverage.
- Earnings-day share price reactionMostly between -5% and +5%Aside from a few exceptions such as Accenture, share price reactions among IT services companies that have reported have been milder than in prior quarters.
- Sample of Indian IT services companiesAmong 13 companies, only Coforge, Persistent Systems, and KPIT have yet to reportThe report uses this sample to observe sequential revenue growth and booking momentum among Indian IT services companies.
- TCS bookings threshold>$8bnTCS again exceeded the $8 billion level in 1Q26/27, which management views as the minimum threshold for bookings.
- Dassault Systemes transportation and mobility software sales+6%In 2Q26, software sales in the transportation and mobility segment grew 6%, despite weakness in the European market.
- Dassault Systemes regional revenue mixEurope 50%, Asia 30%, Americas 20%The report uses this mix to show that automotive-related demand does not depend entirely on Europe.
- Estimated growth for Tata Engineering+12%The report estimates 12% growth for the quarter through June on a constant-scope and constant-currency basis.
- Tata Technologies automotive exposure80% of sales come from the automotive industryIts top 20 customers contribute nearly 90% of sales, showing its high concentration in autos.
- IBM services business FY26 revenue targetLow- to mid-single-digit growthIBM maintained its FY26 target even after 1H26 constant-currency growth of 1% in the services division.
- Accenture M&A budget$3bn → $5bn → $9bnThe report cites Accenture's increased bolt-on acquisition budget to show that industry M&A activity remains active.
- Valuation of some low-valued companies<6-7x EV/FY27e EBITThe report believes this is a low-end range for some companies over the past 25 years, supporting the discussion of valuation recovery.
Impact & implications
The investment implications are broadly positive: pessimistic expectations for the IT services sector may be excessive, and current low valuations have already absorbed some bad news. If 2H26 demand performs close to 1H26, the most undervalued European IT services companies could see an initial rerating. More attractive areas are companies benefiting from customer build-oriented transformation demand, rising AI complexity, automotive R&D and engineering outsourcing, and industry consolidation; relatively less favorable are more 'run'-oriented activities and subsegments more exposed to AI-driven price deflation.
Risks
- Weak discretionary IT services spending may last longer than expected.
- The macro environment could deteriorate relative to expectations at the start of 2026, and uncertainties such as Middle East conflict could weigh on customer decision-making.
- AI-driven price deflation could hurt some subsegments, especially services more oriented toward 'run' activities.
- Automotive-sector customers remain under significant operational and financial pressure, which could lead to budget cuts, pricing pressure, or project delays.
- Industry rerating requires European IT services companies to regain growth above GDP; if 2H26 does not sustain the resilience of 1H26, low valuations may persist.
What to watch
- Whether Alten's 2Q26 automotive-related revenue, to be reported Tuesday evening, improves.
- Whether Reply's 2Q26 trends improve relative to 1Q26.
- Subsequent earnings and guidance from Capgemini, Sopra Steria, Neurones, Wavestone, Kyndryl, Cognizant, Globant, and others.
- Results yet to be reported by Indian IT services companies Coforge, Persistent Systems, and KPIT.
- Bookings, new business signings, net hiring, and management commentary on demand in the second half.
- Whether AI budgets continue to appear as incremental transformation demand rather than broadly crowding out traditional IT services spending.
- Whether European IT services companies return to growth rates above GDP.