Artificial intelligence has turned from a tailwind into a source of anxiety for investors in U.S. software, triggering a historic selloff that has erased years of gains in some names. Yet a growing group of Wall Street strategists now argues that the same disruption fears are setting up one of the more attractive entry points in the sector in years. I see a market that is finally starting to price in realistic AI risks, and in the process, creating selective bargains for investors willing to look past the next quarter.
The debate is no longer about whether AI will reshape software, but about which companies can adapt their business models fast enough to defend margins and growth. As valuations reset and leadership within tech shifts, the gap between perceived AI losers and potential winners has widened to extremes that are hard to justify on fundamentals alone. That disconnect is where the opportunity lies.
From brutal selloff to tentative rebound
The starting point for any discussion of opportunity is the scale of the damage. U.S. software stocks have endured a historic wipeout over the past year, with sector benchmarks suffering their largest 12‑month drawdowns since the post‑dot‑com era, as highlighted by Wall Street strategists. The selling has been particularly acute in high‑multiple cloud and application names, where investors once paid a premium for predictable subscription revenue and are now questioning whether AI will compress pricing power.
There are signs that the worst of the panic may be passing. One widely watched software index has already rebounded about 7% from its trough since Thursday, according to recent trading data, as dip buyers step in and short covering accelerates. That bounce is modest compared with the prior drawdown, but it suggests that forced selling is giving way to more discriminating positioning, with investors starting to separate structurally challenged names from those whose earnings power looks more resilient.
Why AI fear looks overdone in core software
The core bear case is straightforward: if generative AI can automate tasks that once required human users inside enterprise applications, then demand for traditional software seats could fall, and incumbents might see their pricing models disrupted by cheaper, AI‑native rivals. I think that risk is real at the margin, but the market has extrapolated it far beyond what current evidence supports. Many leading platforms are already embedding AI into their products, turning potential disruption into an upsell opportunity rather than an existential threat.
Enterprise vendors such as ServiceNow are rolling out AI‑driven workflows that promise to boost productivity for existing customers instead of replacing them outright, reinforcing the stickiness of their ecosystems. Strategists who have studied the recent earnings season argue that, while management teams are candid about uncertainty, they are not seeing the kind of demand cliff that current valuations imply, a point echoed in analysis of the sector’s earnings resilience. In other words, AI is changing the product roadmap, but it has not yet broken the underlying business model for most large‑cap software names.
Strategists split: bargain or value trap?
Even as some investors lean into the selloff, others warn that the shakeout may not be over. One prominent voice of caution is Brian Sozzi, Executive Editor and long‑time tech watcher, who has highlighted that the “Great Software Stock” reset could still have legs if AI adoption compresses margins faster than companies can cut costs. His camp argues that even after the drawdown, some franchises remain priced for a level of growth that may be hard to deliver in a world where AI commoditizes basic features and shifts value to infrastructure providers.
On the other side, a group of strategists at a major bank has framed the sector’s slump as a classic buy‑the‑dip moment, pointing out that valuations have fallen back to levels last seen just after the market’s so‑called Liberation Day relief rally. They argue that the combination of lower multiples, still‑solid revenue growth and the potential for AI‑driven efficiency gains sets up an attractive risk‑reward profile for patient investors. I find that framing persuasive, provided investors are selective and focus on companies with clear AI strategies and balance sheets strong enough to fund the transition.
Stock pickers lean into the wreckage
The shift from broad‑based selling to targeted buying is already visible in analyst calls. Earlier this week, On Tuesday, the brokerage firm Raymond James upgraded shares of Take‑Two Interactive Software to strong buy from outperform, explicitly framing the move as a chance to pick up a high‑quality name that had been dragged down by AI‑related jitters across the software complex. The call underscored a broader theme: not every company exposed to software or digital content is equally vulnerable to AI disruption, and some may even see demand accelerate as new tools expand their addressable markets.
Bank research desks are making similar arguments in enterprise software. A recent note from Morgan Stanley, highlighted by Natasha Abellard, singled out two beaten‑down names as buys, with the authors stressing that they are “not worried” about the AI threat to at least one of them. The report, which was Published Mon at 3:33 PM EST and Updated Mon at 3:43 PM EST, argued that the market is failing to distinguish between vendors that are integrating AI into their platforms and those that risk being leapfrogged. I see that as a template for how investors should approach the sector: focus less on the headline risk and more on the specifics of product roadmaps, customer lock‑in and the ability to monetize AI features.
What to watch next in earnings and guidance
If AI is the catalyst for both fear and opportunity, the next real test will come through earnings and guidance. As one strategist put it, “The uncertainty around the eventual impact of AI means near‑term earnings results will be important signals of business resilience,” a view captured in analysis of the recent stabilization in U.S. software stocks after a bruising selloff that began in October 2022. I expect management commentary on AI to be scrutinized line by line, with any sign of slower seat growth or pricing pressure likely to trigger sharp moves in individual names, even if the broader indices stay range‑bound.
For investors trying to navigate this landscape, the most useful signals will come from how companies talk about AI monetization, not just AI features. I am watching for details on usage‑based pricing, new AI‑tier subscriptions and early customer adoption metrics, all of which can help separate hype from durable revenue streams. Strategists who see the current environment as a buying window, including those who laid out five reasons the wipeout is an opportunity rather than a warning, are effectively betting that earnings will confirm AI as a margin enhancer over time. If they are right, the current AI disruption fears will look less like a secular turning point and more like a painful, but ultimately temporary, reset in one of the market’s most important growth engines.
