Indian technology stocks have experienced a notable resurgence in July, with the Nifty IT index delivering a robust 16.77% return. This strong performance stands in stark contrast to the Philadelphia Stock Exchange Semiconductor Index, which saw a steep decline of 20.66% over the same period, prompting market observers to question if a 'reverse AI trade' is now in play.
The AI Rally Cools Off, IT Stocks Heat Up
The initial success of artificial intelligence, which fueled a massive rally in various Asian indices like Korea and Taiwan, appears to have subsided in recent weeks. This shift has coincided with a recovery in domestic Indian IT stocks, according to Ankur Punj, MD & Business Head at Equirus Wealth. He noted that the recovery in Indian IT has been visible since May, with the return gap between the two indices peaking in June before reversing course in July.
ICICI Securities also highlighted that the AI/Semiconductor-induced rally in North Asian markets is showing signs of exhaustion, leading to extended profit booking. This rotation of capital could potentially benefit growth-oriented economies like India, where foreign institutional investors (FIIs) outflows have begun to decrease.
Negative Correlation and Valuation Appeal
Historically, Indian IT stocks, as tracked by the Nifty IT index, have often shown a negative correlation with the Philadelphia Stock Exchange Semiconductor Index. While the semiconductor index soared an impressive 60% in 2026 and doubled from its 52-week lows, the Nifty IT index recorded negative returns of 19% in 2026 and 13% over the past year. This divergence makes Indian IT stocks appear more attractive from a valuation perspective.
A study of BSE500 stocks revealed that FPI allocation to the technology sector had dipped to an all-time low of 5.6% in the June quarter, a decrease of 160 basis points sequentially and 370 bps year-on-year. India is often viewed as an 'AI-reverse trade' destination due to the limited number of listed semiconductor and pure-play AI-related stocks domestically.
Is the AI Theme Truly Fading?
Despite the recent correction in AI-related equities, Elara Securities pointed out that global fund flows show little evidence of panic selling. If investor conviction had truly weakened, the first signs would typically emerge in global semiconductor funds, given their direct exposure to the AI theme.
"Instead, the correction attracted fresh buying, with semiconductor fund inflows accelerating during the week," Elara Securities noted, suggesting that the AI theme cannot be entirely dismissed just yet.
Data indicates significant foreign inflows into South Korea ($1.3 billion) and Taiwan ($790 million) alongside substantial domestic investor inflows. Global Technology funds also saw inflows of $15.7 billion. The absence of meaningful fund redemptions suggests that the correction was primarily valuation-driven rather than flow-led, with investors actively buying the dip as key AI markets approached long-term support levels.