Infosys shares gain 20% in July, largest monthly gain in 4 years; will the rally continue?

Indian IT stocks are currently experiencing strong demand on Dalal Street, with many reaching new all-time highs and some trading close to their record peaks. Infosys, in particular, has experienced a significant rise in its stock value recently.

This heightened investor interest is driven by several factors, including the company's healthy performance in the June quarter, expectations of a Federal Reserve rate cut, improving demand conditions in the USA, as indicated by a GDP uptick in the second quarter, and positive forecasts from brokerage firms.

Against this backdrop, Infosys shares have rallied sharply, maintaining upward over the last eight weeks. During this period, the shares have surged from ₹1,406.90 apiece to ₹1,875 apiece, marking a gain of 33.5%. In today's session, they touched a new 52-week high of ₹1,903 apiece. 

This rally has brought shares close to their all-time high of ₹1,953.80, achieved in January 2022. At the current level, the stock is just 4% away from reaching that peak. 

Meanwhile, the shares have risen by 19.60% this month, marking the largest monthly gain since July 2020. Additionally, the stock has gained 21.27% in 2024 so far, surpassing its entire 2023 gain of 2.30%.

On track for a new all-time peak

Going forward, analysts expect the stock to register a new peak given the continued demand for the IT pack. Ruchit Jain, Lead Research Analyst at 5paisa, said, the trend for large-cap IT stocks has turned positive after a long phase of consolidation. Infosys has seen good buying interest post its quarterly numbers, and the trend remains up.

“The RSI readings are overbought, and hence, we do not rule out the possibility of a near-term pullback or consolidation. But any dip in the stock should be used as a buying opportunity as the stock should cross its previous highs soon,” he added. 

Rajesh Bhosale, Equity Technical and Derivative Analyst at Angel One, said, "The IT stock has been generating a lot of attention over the past few weeks. Prices have surpassed the January 2022 high, indicating the potential for continued strong growth. Therefore, a strategy of buying on dips is recommended. The stock has strong support at ₹1800 and resistance in ₹2000."

Growing Fed rate cut hopes

Positive signals from the Federal Reserve about potential rate cuts are especially crucial for markets, including those in India, and particularly for Indian IT companies. This is because Indian IT firms generate a substantial portion—over 70%—of their revenues from the United States.

When interest rates are high in the US, it often leads to reduced consumer spending and lower corporate investment, which can result in fewer orders and diminished growth prospects for Indian IT companies. Historically, IT stocks have been sensitive to US economic indicators and monetary policy decisions.

The recent data on the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, showed a modest increase in U.S. prices for June.

The PCE price index rose by 0.1% last month, following no change in May, while the core PCE price index increased by 0.2%, building on a 0.1% gain in May. This data suggests that the Fed's restrictive monetary policy is yielding results, bringing inflation closer to its 2% target.

Meanwhile, the U.S. economy grew at a faster-than-expected rate of 2.8% in the second quarter of the current year, driven by increased consumer demand. This figure, well above the predicted 2%, demonstrates the economy's resilience despite interest rates reaching a 23-year high.

Encouraging economic data has sparked speculation about the Federal Reserve's future actions. Although the likelihood of a rate cut at next week's FOMC meeting remains low at 4.7%, market sentiment has significantly shifted towards the September meeting.

The CME's FedWatch tool now forecasts a 100% chance of a rate cut in September, with an 87.7% probability of a 0.25% reduction.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.