AI disruption fears create buying chance in US software stocks, strategists say

By Saqib Iqbal Ahmed

NEW YORK, Feb 10 (Reuters) – The severity of the pullback in software stocks in recent days, driven by fears of advances in artificial intelligence disrupting ‍the industry, has created opportunities for investors to position for a rebound in higher-quality stocks, strategists at JP Morgan said.

“The market is pricing in worst-case AI disruption scenarios that are unlikely to materialize over the next three to six months,” JPMorgan strategists, led by Dubravko Lakos-Bujas, said ‌in a note on Tuesday.

“Given the positioning ‌flush, overly bearish outlook on AI disruption of software and solid fundamentals, we believe the balance of risks is increasingly skewed towards a rebound, especially in higher quality software segments,” the strategists wrote.

Global markets were ​rattled last week after AI developer Anthropic’s launch of plug-ins for its Claude Cowork agent reignited fears that rapidly progressing AI ‍systems could encroach on the core ​businesses of traditional software companies, leading to the ​S&P 500 software and services index falling as much as 17% ‍in six sessions through Thursday. The index has rebounded about 7% since Thursday.

While not ruling out further weakness in software stocks, the strategists recommended “investors add exposure to a basket of higher quality and AI-resilient software companies.”

The basket includes Microsoft, Palo Alto Networks, ‍ServiceNow, CrowdStrike Holdings and Datadog, some of the worst-hit stocks in the recent selloff.

Separately, strategists at Morgan Stanley also said they see attractive ‍opportunities in the space, ‍citing several drivers including strong revenue expectations, ​improved earnings revisions and the benefit mega-cap tech ​companies can ⁠reap from a weaker dollar.

“We believe the ‌dislocation in U.S. Software valuations is sentiment-driven, not fundamental,” Katy Huberty, Morgan Stanley global director of research, said in a note.

Meanwhile, retail investors snapped up software and tech stocks following last week’s heavy selloff, largely brushing aside the worries.

(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies ⁠and Chris Reese)