JP Morgan Strategists See Excessive Selloff in Software Stocks, Cite Overblown AI Fears
Investment strategists at JP Morgan Chase & Co., America's largest bank, have issued a significant note to investors, asserting that the recent sharp decline in software stocks may be excessive and potentially driven by fears that are not fully justified by current business conditions. The bank's analysis suggests that markets are pricing in near-term disruption from artificial intelligence at levels that appear unrealistic, thereby creating substantial room for software shares to recover in the coming period.
Market Sentiment Versus Business Fundamentals
Led by Dubravko Lakos-Bujas, the JP Morgan strategy team emphasized that investors could strategically increase their exposure to higher-quality software companies that demonstrate greater resilience to AI-related changes. The team wrote in their note, "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." This perspective highlights a critical disconnect between market sentiment and the underlying stability of the software sector.
According to the bank's assessment, recent price movements in the software industry have been extreme, which could facilitate a rotation back into software stocks in the short term. This volatility was notably triggered after Anthropic unveiled its latest AI tool, leading to a major selloff over concerns that new AI technologies could weaken traditional software-as-a-service businesses. The selloff impacted companies across the sector, including those with existing AI partnerships or access to proprietary data, pushing the S&P Composite 1500 Software Index to its lowest level since the market volatility observed in April.
Identifying AI-Resilient Software Companies
JP Morgan pointed to specific companies such as Microsoft and CrowdStrike Holdings as prime examples of firms that could benefit from AI by enhancing workflows rather than being disrupted by it. The bank noted that long-term enterprise contracts and high switching costs could effectively limit short-term risks for these businesses, providing a buffer against market fluctuations.
The note further clarified that it remains uncertain whether AI will ultimately replace traditional software companies over the long term. However, current market sentiment appears more negative than warranted at this stage. JP Morgan highlighted that recent quarterly results from software firms have been largely stable, and analysts are forecasting earnings growth of 16.8 percent for the sector in 2026, underscoring robust fundamentals.
List of 'AI-Resistant' Software Stocks
In related news, JP Morgan analysts have compiled a list of software stocks they deem 'AI-resistant,' suggesting these companies are well-positioned to withstand AI-related disruptions. The list includes:
- Microsoft
- CrowdStrike
- Twilio
- Okta
- ServiceNow
- Palo Alto Networks
- Zscaler
- Check Point Software
- SentinelOne
- Snowflake
- Datadog
- Veeva Systems
- Guidewire Software
- CoStar Group
- Tyler Technologies
- JFrog
- SailPoint
- Netskope
- Q2 Holdings
This comprehensive analysis from JP Morgan serves as a crucial reminder for investors to differentiate between market hype and tangible business performance, particularly in the rapidly evolving landscape of artificial intelligence and software technology.
