Equity strategists at major Wall Street firms are framing the recent, sharp drop in software stocks as an opportunity for investors to position for a rebound rather than a signal to retreat. They argue the market has overreacted to the prospect that advances in artificial intelligence could quickly eat into the revenue streams of established software companies.
In a Tuesday note, strategists at JPMorgan, led by Dubravko Lakos-Bujas, said the recent moves reflect a market pricing in worst-case AI disruption scenarios that are unlikely to unfold over the next three to six months. The team highlighted a combination of washed-out positioning, an overly negative view on AI’s disruptive pace, and intact corporate fundamentals as reasons why upside risk is growing, particularly for higher-quality software segments.
Last week’s market turbulence followed a development from AI developer Anthropic, whose release of plug-ins for its Claude Cowork agent renewed investor concern that rapidly evolving AI systems could encroach on core businesses of traditional software providers. The reaction was severe: the S&P 500 software and services index plunged as much as 17% across six trading sessions through Thursday. Since then, the index has retraced roughly 7% from that low, reflecting some buyer interest after the selloff.
While JPMorgan did not rule out the possibility of further weakness in software names, its strategists recommended investors add exposure to a curated basket of higher-quality and AI-resilient software companies. That suggested basket comprises Microsoft, Palo Alto Networks, ServiceNow, CrowdStrike and Datadog - firms that were among the hardest hit in the recent selloff.
Separately, Morgan Stanley strategists also signaled they see compelling opportunities within the software space. Their note cited several supportive forces, including healthy revenue expectations, an improvement in earnings revisions, and a potential benefit to large-cap technology companies from a softer U.S. dollar.
Katy Huberty, Morgan Stanley’s global director of research, summarized the firm’s view succinctly: the valuation dislocation in U.S. software appears to be driven by sentiment rather than by a sudden deterioration in fundamentals.
In the wake of last week’s decline, retail investors notably stepped in to buy software and other technology stocks, largely dismissing the more dire AI disruption scenarios that prompted the earlier selling pressure.
Bottom line: Strategists at leading investment banks view the recent selloff in software equities as driven mainly by sentiment and positioning. They recommend considering added exposure to higher-quality, AI-resilient software companies while acknowledging the potential for continued volatility.