European software rally leaves next leg to long-only investors, Deutsche Bank says

Deutsche Bank strategists have recently shifted their stance on European software stocks, ending their bullish outlook and advising investors to take a neutral position. Following a 13% rally in the sector, the analysts now believe that artificial intelligence advancements and data center limitations are altering market expectations. They suggest that unless investors have a strong conviction, a neutral approach may be the most prudent course of action.

Initially recommended as a hedge against semiconductor volatility in March, European software stocks had seen a 13% surge over the past month, outpacing the broader STOXX 600 index by 11 percentage points. However, this surge prompted Deutsche Bank to close their tactical overweight position, indicating that the next significant move would likely come from long-only investors.

The strategists highlighted several software companies with decreasing short interest, including SAP SE, Dassault Systemes SE, Hexagon AB, The Sage Group plc, Nemetschek SE, and Temenos AG. They caution that the evolving agentic AI paradigm could continue to impact sentiment until software vendors provide clearer indications of future growth.

Despite closing their directional overweight position, Deutsche Bank believes European software valuations still carry overly pessimistic long-term assumptions, with a projected terminal growth rate of around 2% from 2030 onward.

The analysts also noted market concerns regarding data center construction by hyperscalers, who may face increasing difficulties due to supply chain bottlenecks and waning local political support. However, Deutsche Bank remains optimistic about the software sector, viewing it as the more likely beneficiary in the evolving market landscape.