Death of software 'greatly overstated' as sector flips the script on chip stocks: Chart of the Day

Software stocks have made a remarkable resurgence in recent months, eclipsing the faltering chip sector, according to Brian Mulberry, a market strategist at Zacks Investment Management. The misconception that software was on its way out has been largely debunked, as the need for customized AI tools continues to drive demand for these technologies.

The iShares Expanded Tech-Software Sector ETF (IGV) has surged 15% over the past three months, while Microsoft (MSFT), Palantir (PLTR), and Salesforce (CRM) have each climbed more than 30% during the same period. In contrast, the iShares Semiconductor ETF (SOXX) has struggled, losing 17% over the same timeframe.

Cybersecurity is emerging as the standout sector within software, propelled by the rise of AI agents that require enhanced protection. Palo Alto Networks (PANW) and CrowdStrike (CRWD) are leading the pack, up roughly 30% and 40%, respectively. Despite the AI chip stocks dominating year-to-date gains, this momentum has waned in recent months. Micron (MU) and SanDisk (SNDK) have both underperformed, with the former down more than 20% from its June high and the latter off over 30% from its summer record highs.

Strategists view the current AI-driven selloff as an opportunity rather than a cause for concern, with quality software companies expected to rebound as investors look for value. Among the favored picks are Arista Networks (ANET), AMD (AMD), Nvidia (NVDA), Dell (DELL), and Hewlett Packard Enterprise (HPE). The appetite for AI expansion remains strong, even as industry leaders caution against a rapid pace of development.

Anthropic CEO Dario Amodei, OpenAI (OPAI.PVT) CEO Sam Altman, and Tesla (TSLA) CEO Elon Musk have all called for a more measured approach to AI advancement. However, for the software leaders responsible for implementing these technologies, maintaining robust defensive spending is non-negotiable. As Okta co-founder and CEO Todd McKinnon pointed out, attackers are not slowing down, making it imperative for companies to invest in innovative defensive measures.