A recent sell-off in software stocks has created a buying opportunity, according to analysts at JPMorgan. The firm is advising investors to buy the dip
in 14 high-quality software companies, arguing that fears surrounding artificial intelligence disruption have driven prices to deeply pessimistic levels
.
The downturn, which saw the software sector slammed last week, has resulted in a $2 trillion loss in market capitalization, reducing the sector’s weight in the S&P 500 from 12% to 8.4%, according to a JPMorgan team led by Dubravko Lakos-Bujas. The iShares Expanded Tech-Software Sector ETF (IGV) experienced a decline of over 20% in three weeks, and remains 28% below its September all-time high.
However, JPMorgan believes the market has overreacted, pricing in worst-case, AI disruption scenarios that are unlikely to materialize
in the near term – specifically, the next three to six months. The firm contends that the indiscriminate sell-off has impacted both established quality
software companies and more speculative growth stocks.
Why the Rebound?
Several factors underpin JPMorgan’s optimistic outlook. The analysts point to the unlikelihood of the most severe AI disruption scenarios, a positive outlook for the broader technology sector, and extremely low software-sector positioning. Strong fundamentals and tumbling valuations – reaching levels not seen since last year’s Liberation Day – are seen as attractive entry points for investors.
JPMorgan also highlights supportive software earnings as a key indicator. The firm notes that short interest levels in software are currently at record highs, while hedge funds are favoring AI semiconductors over software, a dynamic that JPMorgan believes skews the balance of risks toward an imminent rebound
.
Key Picks for AI Resilience
JPMorgan has identified several AI-Resilient
software stocks poised to weather the ongoing disruption. Among these are industry giants like Microsoft and ServiceNow, as well as cybersecurity specialist CrowdStrike. The firm also recommends considering Palo Alto Networks, despite its recent 16% decline over the past 12 months.
Microsoft () is highlighted as a particularly strong pick, with a 12-month return of +1%. The firm believes Microsoft’s diverse portfolio and established market position provide a buffer against the more disruptive aspects of AI. ServiceNow’s performance over the last 12 months was not specified in the provided sources.
Palo Alto Networks, while experiencing a 12-month return of -16%, is also flagged as a high-quality stock resilient to AI-driven challenges. This suggests JPMorgan sees value in the company’s cybersecurity offerings, which are likely to remain in demand regardless of advancements in artificial intelligence.
Broader Market Context
The current situation echoes concerns seen in , as detailed in reports on global dealmaking trends. J.P. Morgan’s analysis of M&A activity, IPOs, and private credit also points to a dynamic market landscape where AI is a significant, yet often overhyped, factor.
The ISG Index Q425 Technology Industry Update, as reported by Morgan Lewis, further underscores the evolving nature of the technology sector. While the report doesn’t directly address the software sell-off, it highlights the ongoing shifts and adjustments within the broader tech ecosystem.
Implications for Investors
JPMorgan’s recommendation to buy the dip
is a contrarian one, suggesting that the market’s fear has created an opportunity for savvy investors. The firm’s analysis implies that the long-term fundamentals of these software companies remain strong, and that the current downturn is a temporary overreaction to AI-related anxieties.
However, investors should exercise caution. While JPMorgan believes the worst-case scenarios are unlikely, the potential for AI disruption remains a real threat. The firm’s assessment is based on a specific timeframe – the next three to six months – and the situation could evolve rapidly. The report emphasizes the importance of focusing on higher quality Software segments (i.e., Cyber)
, suggesting a preference for companies with established market positions and strong fundamentals.
The current market conditions present a complex picture. While the software sector has experienced a significant correction, JPMorgan’s analysis suggests that the sell-off may have gone too far, creating a potential buying opportunity for investors willing to take on the risk. The firm’s focus on AI-resilient stocks highlights the importance of identifying companies that are well-positioned to navigate the evolving technological landscape.
