Software stocks are being repriced as investors reassess how artificial intelligence will reshape the industry. Some fund managers now argue the selloff has gone too far, even as uncertainty around long-term earnings remains unresolved.
Deutsche Bank moved to an overweight stance on the sector in March, citing valuation compression, while investors including Jennison Associates and Nuveen are selectively rebuilding positions in companies they believe can absorb or even monetize AI disruption.
“The extent of the correction that has taken place this year is excessive,” said Lodewijk van der Kroft, portfolio manager at Comgest. “These companies are not sitting ducks waiting for the butcher to arrive,” he told Investment Officer.
The shift in tone reflects a growing distinction within the sector between companies exposed to disruption and those positioned to benefit from it.
Embedded advantage
Van der Kroft argues that the focus should be on companies deeply embedded in client workflows, with proprietary data and the financial capacity to invest in AI. Comgest holds positions in SAP, RELX, Adyen, Experian, LSEG, Microsoft, Verisk, S&P Global and Intuit.
“These companies hold proprietary data that external AI agents simply cannot access,” he said.
At RELX, now trading at around 17 times earnings, he sees a valuation level he says he has rarely encountered in his career.
AI risk repricing
Software has long been one of the most widely owned and highly valued segments of the equity market. That positioning is now being challenged as investors reassess the durability of subscription-based business models in a world of AI-driven automation.
The iShares Expanded Tech-Software Sector ETF is down more than 20 percent this year and roughly 30 percent from its September 2025 peak.
The selloff reflects a reset in terminal value, the long-term earnings multiple investors apply beyond standard forecast horizons, as opposed a deterioration in current fundamentals.
“When you value a company, the current numbers all look fine,” Van der Kroft said. “But what exactly happens in five years? That uncertainty is now being priced in.”
Oracle illustrates the disconnect. The stock is down 52 percent from its September peak despite revenue growth of 22 percent and cloud infrastructure expansion of 84 percent. It now trades at around 20 times forward earnings, below the S&P 500 multiple, even as analysts project annual sales growth of 35 percent through 2029.
Selective buying
Investors are responding by narrowing their exposure.
Jennison Associates is avoiding vertical SaaS and traditional license-based models, which it sees as most exposed to AI-driven disruption. Instead, it is focusing on infrastructure and security providers such as Cloudflare, CrowdStrike, Snowflake and Datadog.
On the hardware side, it sees opportunity in chip equipment makers Lam Research and ASML, as well as TSMC, where constrained supply and limited competition continue to support pricing power.
“Companies are currently throttling availability of their AI products well below their potential capacity,” wrote Zac Gill, global equity research analyst at Jennison Associates. “That says a lot about underlying demand.”
Laura Cooper, global investment strategist at Nuveen, sees a similar pattern emerging.
“The pockets of opportunity in software are companies with customization and defensible moats,” she told Investment Officer. “Companies with commoditized business models are most at risk.”
Goldman Sachs has constructed a long/short basket that reflects the same view, favoring companies with high switching costs and regulatory barriers while shorting those more exposed to workflow automation.
Macro overlay
The macro backdrop adds a further layer of complexity.
Analysis from Schroders shows that technology stocks have historically underperformed in stagflationary environments, where growth slows and inflation remains elevated. Rising energy prices are increasing the probability of such a scenario.
“The US market stands out for its large exposure to IT,” said Duncan Lamont, head of research at Schroders. Europe, with its heavier weighting in industrials and utilities, may be relatively better positioned.
He added that today’s technology companies are more profitable and globally diversified than in previous cycles, making direct comparisons imperfect but still instructive.
Van der Kroft said the sector remains investable, but only with greater discrimination.
“We are moving from a rising tide to a market where the difference between winners and losers becomes much clearer,” he said.