Nifty IT stocks rebound in July as semiconductor shares falter; reverse AI trade at play?

Indian technology stocks have made a smart rebound, with the IT benchmark Nifty outperforming the semiconductor benchmark Philadelphia Stock Exchange Semiconductor Index by a wide margin in July. The recovery was visible since May. The return gap between the two indices (base as May) for the period peaked in June, only to reverse in July.

Nifty IT has delivered a solid 16.77 per cent return in July compared with a steep fall of 20.66 per cent in the Philadelphia Stock Exchange Semiconductor Index.  "The initial AI success, which had triggered a massive rally in Asian indices like Kospi, Taiwan seem to have subsided over the past few weeks, resulting in a recovery in domestic IT stocks," said Ankur Punj, MD & Business Head at Equirus Wealth.

Earlier today, ICICI Securities also noted that the AI/Semiconductor induced rally in North Asian markets is now showing sign of exhaustion, resulting into extended profit booking. "This rotation could benefit growth-oriented economies like India wherein FII’s outflows have started to witness deterioration," it said.

Indian IT stocks, as suggested by Nifty IT tend to have a negative correlation with Philadelphia Stock Exchange Semiconductor Index that soared 60 per cent in 2026 so far and doubled from its 52-week ago levels. Against this, Nifty IT index delivered negative returns of 19 per cent in 2026 and 13 per cent in the past one year.
 
A study of BSE500 stocks showed FPI allocation to technology sector had dipped to an all-time low of 5.6 per cent, down 160 basis points sequentially and 370 bps YoY in the June quarter. India is long seen as AI-reverse trade due to lack of listed semiconductor and AI-related stocks. At home also, IT stocks are outperforming other sectors, supported mainly by attractive valuations and better-than-expected Q1 results..

That said, Elara Securities noted that global fund flows showed little evidence of panic selling despite the sharp correction across AI-related equities this past week.  If investor conviction had weakened, the first signs would typically have emerged in global semiconductor funds, given their direct exposure to the AI theme, it said.

"Instead, the correction attracted fresh buying, with semiconductor fund inflows accelerating during the week," it said suggesting one cannot shrug off AI theme as yet.

Data showed South Korea attracted $1.3 billion of foreign inflows alongside $930 million from domestic investors, while Taiwan domestic funds recorded $4.8 billion of inflows, marking the third-largest weekly inflow in history. Foreign investors also added $790 million to Taiwan, Elara said on Friday.

Across sectors, Global Technology funds saw inflows of $15.7bn, while Industrial fund inflows continued but at a slower pace of $558mn. The absence of meaningful fund redemptions suggests the correction was valuation-led rather than flow-led. As key AI markets approached long-term support, investors have started buying the dip.