M. Stanley sees improving risk-reward for IT Services after positive CIO survey

Investing.com -- Morgan Stanley (NYSE:MS) raised its view on the US IT Services sector to In-Line from Cautious, citing a more balanced risk-reward for the next 12 to 18 months and improving growth expectations.

The upgrade follows findings from the firm’s latest CIO survey, which pointed to slightly higher IT budget growth in 2025.

According to the report, Morgan Stanley’s Q4 2024 CIO survey “indicates slight IT Services budget growth (+2.8% in ’25 vs +2.6% in ’24), but still below typical pre-COVID annual growth rates.”

The firm also highlighted that venture capital (VC) investment, a key demand indicator, appears to have stabilized at pre-pandemic levels.

Investor expectations for the sector now seem appropriately calibrated, with many looking for a return to pre-pandemic growth rates by 2026. “Most investors are looking for a return to pre-COVID IT Services growth rates exiting ’25 and for ’26,” analysts led by James E. Faucette said in a note.

“To us, those expectations seem reasonable given the ramping of longer-duration projects combined with stability of shorter duration (discretionary) projects,” they added.

Still, the firm remains cautious about significant upside potential, noting that key leading indicators “still look modestly weaker than we would expect for there to be upside.” As a result, Morgan Stanley maintains an Equal-Weight rating across most IT Services stocks, with the exception of Taskus Inc (NASDAQ:TASK), which it rates Overweight.

The industry upgrade also comes as IT Services stocks have lagged broader software peers. According to Morgan Stanley, the underperformance “is likely driven by the residual impact of a higher-for-longer rate environment, which has compelled IT Services clients to curtail discretionary spending.”

While maintaining its ratings, the Wall Street firm lifted its price targets on several companies from the sector, including Accenture plc (NYSE:ACN), Cognizant Technology Solutions Corp (BVMF:CTSH34) Class A (NASDAQ:CTSH), EPAM Systems Inc (NYSE:EPAM), and more.