Key Points:
- Barclays reiterated its cautious stance on the IT services sector, warning of severe near-term downside risks driven by generative AI disruptions.
- The bank downgraded prominent digital IT services players EPAM Systems and Grid Dynamics to Hold due to slowing corporate tech spending.
- Clients are pausing new software projects as they await the next generation of AI and its massive deflationary impact on development costs.
- Despite a steep 30% to 35% decline in stock prices this year, Barclays warned that low valuation multiples alone will not attract buyers.
Global technology consulting and software engineering firms are facing a painful and highly challenging market transition. On Friday, May 29, 2026, British multinational bank Barclays reiterated its highly cautious stance on the IT services sector, warning that the current demand environment carries far more downside risk than potential upside. The bank’s equity research division issued a major warning on Barclays’ digital IT services, downgrading key industry leaders because the rapid, unstoppable rise of artificial intelligence is fundamentally destroying traditional corporate software-as-a-service (SaaS) and consulting business models.
As part of its comprehensive sector review, Barclays downgraded prominent digital IT services companies EPAM Systems Inc. (EPAM) and Grid Dynamics Holdings Inc. (GDYN) from Buy equivalents to Hold. Additionally, the bank stated that it has become “incrementally more negative in the near term” on its broader coverage, which also includes Latin American software engineering giant Globant (GLOB). While tech stocks linked directly to hardware, memory chips, and data centers are soaring to record highs, the software development and IT consulting segments are facing a severe, prolonged structural downturn.
This major market recovery comes as investors react to two powerful catalysts: persistent global demand for AI hardware and apparent diplomatic progress in the Middle East. While global IT spending has historically exceeded $1 trillion annually, corporate clients are now actively pulling back on near-term discretionary projects. Barclays analyst Surinder Thind explained that first-quarter financial results across the sector were largely in line with expectations. Still, full-year revenue guidance remained heavily weighted toward the second half of the year. This back-half weighting indicates that companies are delaying their capital deployments, choosing to wait out the current economic cycle.
More importantly, this corporate pause reflects what analysts term a “wait-and-see” approach to emerging technology. Rather than investing in expensive, legacy software integration projects, businesses are waiting for next-generation artificial intelligence models to mature. Clients anticipate that autonomous AI agents and low-code or no-code software automation will deliver massive deflationary impacts on traditional development costs. The sudden shift toward AI automation could drag down near-term organic software revenue growth by up to 1.5% annually across legacy players, making corporate clients highly reluctant to sign long-term, high-priced consulting contracts today.
This persistent spending hesitation has raised serious anxieties on Wall Street regarding the long-term “terminal value” of traditional IT services companies. For years, investors valued these firms at high multiples because they believed that the transition to the digital economy would guarantee a permanent, growing demand for human software engineers. Now that generative AI can automate up to 40% of standard coding and system maintenance tasks, investors are questioning whether these consulting firms can ever return to their historical growth rates.
For EPAM Systems, Barclays highlighted a highly challenging path back to sustainable, double-digit organic revenue growth. The company, which historically relied on a massive pool of highly skilled software developers in Eastern Europe, must now completely restructure its service offerings to focus on high-value AI integration and consulting. However, transitioning a workforce of tens of thousands of human programmers into AI coordinators is an expensive, slow-moving process that will likely weigh on the company’s operating margins for several quarters.
Meanwhile, Grid Dynamics faces its own localized hurdles, primarily due to its high business exposure to the retail industry. The retail sector remains highly sensitive to economic cycles and rising transport costs, and cash-strapped retailers are increasingly finding themselves slashing their discretionary IT budgets during periods of high inflation. Barclays warned that, because of this retail concentration, Grid Dynamics’ organic growth is unlikely to accelerate as quickly as management originally projected, leaving its recovery timeline highly uncertain.
Due to these compounding structural threats, valuations across the digital IT services sector have de-rated sharply. The group currently trades at an average price-to-earnings (P/E) multiple of just 9 times on 2026 estimates and 8 times on 2027 estimates. This dramatic valuation contraction follows a painful 30%-35% decline in stock prices year to date. However, Barclays warned that these low, single-digit multiples are unlikely to attract institutional buyers in the near term, as such valuations alone cannot replace the need for organic revenue growth.
Ultimately, the battle between legacy IT services and emerging AI technologies is rewriting the rules of the global digital economy. As companies like Google, Microsoft, and Amazon continue to roll out automated development platforms, traditional software consultants must find creative ways to prove their value. Until these service providers can successfully integrate AI to lower their own delivery costs and build deeper, more strategic partnerships with their clients, the digital IT services sector will remain trapped in a valuation trough, proving that in the digital age, software automation can easily turn today’s market leaders into tomorrow’s legacy dinosaurs.
