JPMorgan lists five main reasons: recommend buying US software stocks on dips

Last Tuesday, after Anthropic launched its new artificial intelligence tool, U.S. software stocks initially plummeted. Many investors’ concerns about U.S. software technology stocks intensified, and UBS also downgraded its rating on U.S. tech stocks this week.

Meanwhile, another Wall Street investment bank offered a completely different perspective: the decline in software stocks is not a warning but an opportunity.

This is the view expressed in JPMorgan’s report on Tuesday. JPMorgan believes that as investors withdrew from the sector last week, software stocks are now quite attractive, and the recent sell-off has provided a reliable entry point for affected stocks.

The bank’s analysts listed five reasons why they are optimistic about the short-term prospects of software stocks.

1. The worst-case “AI disruption” scenario seems unlikely to happen

JPMorgan states that this “software doomsday theory” was triggered by fears of AI disruption. After Anthropic launched its new AI tool last Tuesday, the market worried that software applications might be replaced by AI, causing investor sentiment to fall to what JPMorgan analysts describe as “extremely pessimistic” levels.

The analysts wrote, “In the tech sector, concerns about disruption risks have led to widespread sell-offs of high-quality and speculative growth software companies.”

However, JPMorgan believes that the scenario of AI replacing software applications on a large scale is unlikely because enterprise software “is deeply embedded in all aspects of business operations,” meaning that in the next three to six months, some of the most dire scenarios feared by the market are unlikely to materialize.

The analysts added, “Importantly, new evidence suggests that in the short term, AI is more likely to be a complement to software workflows rather than a replacement.”

2. Are software stocks now at a more attractive valuation?

JPMorgan initially predicted that investors this year would favor hardware and semiconductor stocks, but last week’s stock price movements may prompt a shift back toward software stocks.

The analysts stated that the sector’s sell-off has pushed stock prices down to near the lowest levels since the “Doomsday” crash last year, providing investors with an opportunity to selectively invest in more resilient companies.

3. Software stock exposure is at very low levels

JPMorgan noted that the net exposure of the U.S. software industry has fallen to 1%. Additionally, due to deteriorating sentiment among retail investors, short positions in software have recently increased.

This bearish positioning could serve as a contrarian indicator for future gains once investor sentiment shifts.

4. Strong earnings expectations

Despite the negative shift in investor sentiment, the earnings outlook for software companies remains very optimistic.

Wall Street expects the sector’s revenue and profits to grow by over 16% this year, with profit margins also improving, making the sector’s earnings outlook among the strongest in the S&P 500.

5. Profitability remains solid

Despite the risks posed by AI, the latest quarterly reports from software companies have been strong.

By the time JPMorgan released its report, all published earnings data from S&P 500 software companies had exceeded Wall Street expectations.

Analysts specifically mentioned Microsoft and ServiceNow. Both companies achieved strong profit growth, yet their stock prices declined significantly.

(Article source: Cailian Press)