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MORGAN STANLEY SENDS IT SERVICES TO THE SIDELINES AS AI TAKES THE LEAD

Morgan Stanley $(MS)$ downgrades U.S. IT Services industry view from "In-Line" to "Cautious," reflecting a significant shift driven by artificial intelligence $(AI)$.

The structural turning point in IT services is clear—AI is reshaping budgets, business models, and investment priorities, leading to cautious sector sentiment and downward revisions for key companies.

The brokerage lowers its target price for Accenture ACN.N shares, saying that while it leads in technology investment, especially via acquisitions, most Gen AI projects are still at the proof-of-concept stage and haven't driven significant growth.

For EPAM Systems EPAM.N, firm notes the company is focused on building in-house Gen AI solutions like EPAM DIAL, funding these organically but facing margin pressure as investments increase.

In Europe, MS notes Capgemini CAPP.PA is putting major resources into AI training and partnerships, but is challenged by lower prices and skepticism from investors about changing the traditional outsourcing model.

Tietoevry TIETO.HE is the Nordic IT services provider and is working to bring more AI into its offerings, though many businesses are still slow to adopt the technology.

Morgan Stanley's analysts say "AI is crowding out IT budgets, squeezing contract pricing, and pushing services firms to invest in their own IP—likely lowering returns," in a note dated September 8, 2025.

An index tracking IT services in the U.S. .SPLRCITCS has lost about 10% this year, compared with a 10% gain for the benchmark S&P 500 .SPX.

Slow growth and pressured returns will persist, making it hard for IT services stocks to outperform. The sector's recovery will depend on companies' ability to monetize AI investments and accelerate growth amid ongoing structural change.

(Akriti Shah)

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