The outlook for the US IT services industry is bleak, with Morgan Stanley significantly cutting its target price for Accenture Plc Class A (ACN.US) to $271 before its earnings release.

Morgan Stanley has released a research report, downgrading its rating on the US IT services industry from "neutral" to "cautious" due to the potential for accelerated investments in Artificial Intelligence (AI) to lead to a decrease in Return on Invested Capital (ROIC). Morgan Stanley also maintained its "hold" rating on Accenture Plc Class A (ACN.US) ahead of the company's fourth quarter fiscal report for 2025, lowering the target price from $325 to $271. Previously, Morgan Stanley downgraded its rating on the US IT services industry to "cautious" due to reasons including: AI investments crowding out IT services budgets, increasing pricing pressures, and diluting ROIC. Many investors agree with the view expressed by the company due to the ongoing threat from generative AI, and have reduced their holdings in the US IT services industry. However, Morgan Stanley believes that the company forecasts are reasonable, supporting its "hold" rating on stocks in this sector. Morgan Stanley also listed three key issues in the report and provided their views. Issue 1: Do IT services companies have an advantage over software companies in developing proprietary Intellectual Property (IP)? Morgan Stanley view: Software companies have a greater advantage. Software companies have the ability to provide temporary AI solutions and are gradually taking over work previously done by IT services companies. This competitive advantage is further enhanced by the accelerated budget growth in the software field, allowing companies to invest more in building new capacity. Software vendors can integrate software and services into comprehensive products, offering more cost-effective alternatives to customers. Therefore, Morgan Stanley believes that IT services companies need to accelerate their investment pace to remain competitive in the market. Issue 2: How much does generative AI impact the IT services industry? Morgan Stanley view: The likely reduction in discretionary spending is likely a key factor driving price competition. IT services companies are making pre-commitments to efficiency gains from generative AI without mature frameworks, leading to execution and technical risks of failure to meet promises. Issue 3: Will LLM developers rely on IT services companies to fill funding gaps? Morgan Stanley view: No. LLM developers are currently focused on improving model performance and driving product differentiation, placing less emphasis on IT services partnerships focused on product promotion. Stable venture capital funding allows LLM developers to focus on acquiring new customers, while also alleviating concerns about short-term cash consumption. Morgan Stanley also provided comments on Accenture Plc Class A in the report. Investors are cautious ahead of the latest quarterly report from Accenture Plc Class A, as the company's guidance for the 2026 fiscal year may disappoint. Morgan Stanley maintains a forecast of 5% revenue growth for Accenture Plc Class A in the 2026 fiscal year, but due to the pessimistic industry outlook, it significantly lowered its valuation multiple from 24 times to 20 times, resulting in a target price reduction from $325 to $271. Accenture Plc Class A is expected to report revenue of $17.33 billion and earnings per share of $2.97 for the fourth quarter of the 2025 fiscal year on September 25. As of the close of trading on Tuesday, Accenture Plc Class A fell by 0.45% to $236.81. The stock has fallen by 32% year-to-date.