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)
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