The dramatic plunge in software stocks last week isn’t a warning, but an opportunity.
That’s the message from JPMorgan on Tuesday as the bank tells clients that software shares are attractive after investors fled the sector over the course of three days.
Analysts at the bank outlined five reasons the recent software market meltdown presents an opportunity to buy the dip.
The software sector saw its largest 12-month drawdown in over 30 years in a sell-off that started last Tuesday after Anthropic unveiled its new AI tools. The rout vaporized roughly $2 trillion in market capitalization and reduced its S&P 500 weight to 8.4% from 12%.
The software apocalypse was fueled by AI disruption fears driving investor sentiment to what JPMorgan analysts described as “deeply pessimistic levels.”
“Within Technology, this perceived risk of disruption has driven sell-offs in both Quality and Speculative Growth Software names indiscriminately,” the analysts wrote. However, the bank added that it sees several reasons the event last week marks a solid entry point for affected stocks.
Here’s why JPMorgan says investors should buy the dip.
1. Worst-case disruption scenarios look unlikely
JPMorgan sees enterprise software “deeply embedded across the corporate landscape,” meaning that some of the market’s worst-case scenarios are unlikely to pan out over the next three to six months.
“Importantly, emerging evidence suggests that AI is more likely to be additive to software workflows in the near term rather than a substitute,” the analysts wrote.
2. Broader tech outlook
The bank predicted a preference among investors for hardware and semiconductor shares this year, but last week’s price action could drive investors back into software.
The analysts said buyers have a chance to selectively gain exposure to more resilient names.
3. Software positioning is at extreme lows
Investors are piling into physical assets, signaling a shift away from digital assets. This phenomenon is evident in the recent performance of gold and bitcoin: the metal has rallied from its lows, while the crypto continues to struggle.
JPMorgan said that net exposure to software has fallen to the 1 percentile since 2018, while the semiconductor sector has climbed to the 100th percentile in the same period.
There has also been an increase in short interest in software as retail traders have soured on the sector.
Such bearish positioning can be a contrarian indicator of gains to come once investor sentiment shifts.
4. Strong fundamentals and Liberation-Day-low valuations
Consensus estimates for the software sector are strong despite the negative shift in investor sentiment.
Wall Street expects more than 16% growth in both sales and earnings, along with margin expansion, for software, making the sector’s projections among the strongest in the S&P 500.
JPMorgan analysts said the sector sell-off has brought prices down to around the lows seen right after last year’s “Liberation Day” crash.
5. Earnings remain supportive
Despite AI disruption fears, software’s latest quarterly earnings have been strong.
All S&P 500 Software companies that released results at the time of JPM’s report have beaten Wall Street’s expectations.
The analysts highlight Microsoft and ServiceNow. Both names reported earnings beats, but saw their stocks plunge.
