JPMorgan analysts are urging investors to view the recent software stock selloff as a buying opportunity rather than a warning sign. According to the bank, the dramatic plunge in software stocks last week has created attractive entry points for investors willing to buy the dip in this battered sector.
The software sector experienced its largest 12-month drawdown in over 30 years during a three-day rout that began last Tuesday following Anthropic’s unveiling of new AI tools. The selloff erased approximately $2 trillion in market capitalization and reduced the sector’s S&P 500 weight from 12% to 8.4%, according to JPMorgan’s analysis released Tuesday.
AI Disruption Fears Drive Software Stock Decline
The sharp decline was fueled by investor concerns about AI disruption threatening traditional software business models. JPMorgan analysts described investor sentiment as reaching “deeply pessimistic levels” during the selloff. The bank noted that fears of disruption drove indiscriminate selling across both high-quality and speculative growth software names.
However, JPMorgan outlined five key reasons why the recent market turmoil presents a compelling case to buy software stocks. The analysis suggests that panic selling may have created value opportunities in fundamentally sound companies.
Enterprise Software Remains Deeply Embedded
JPMorgan’s first argument centers on the unlikelihood of worst-case disruption scenarios materializing in the near term. The bank emphasized that enterprise software is deeply embedded across the corporate landscape, making rapid displacement improbable over the next three to six months.
Additionally, the analysts pointed to emerging evidence suggesting AI will likely complement existing software workflows rather than replace them entirely. This additive relationship could support continued revenue growth for established software providers.
Positioning Reaches Extreme Bearish Levels
Investor positioning in software stocks has fallen to extreme lows, potentially setting up a contrarian buying opportunity. According to JPMorgan, net exposure to the software sector has dropped to the 1st percentile since 2018, while semiconductor positioning has climbed to the 100th percentile over the same period.
Meanwhile, short interest in software stocks has increased as retail traders have turned bearish on the sector. Such extreme bearish positioning can serve as a contrarian indicator, potentially signaling gains once sentiment shifts back toward positive territory.
Valuations and Fundamentals Support Recovery
Despite the negative sentiment shift, consensus estimates for software stocks remain robust. Wall Street analysts expect more than 16% growth in both sales and earnings for the sector, along with margin expansion, making software projections among the strongest in the S&P 500.
In contrast to the pessimistic market mood, JPMorgan noted that the selloff has pushed valuations down to levels last seen following the “Liberation Day” market crash. The disconnect between strong fundamental expectations and depressed valuations suggests potential upside for investors.
Earnings Continue to Beat Expectations
Recent quarterly results have defied the disruption narrative plaguing software stocks. According to JPMorgan’s report, all S&P 500 software companies that had released earnings at the time exceeded Wall Street’s expectations.
The analysts highlighted Microsoft and ServiceNow as examples of companies delivering earnings beats despite their stocks plunging in the broader selloff. This performance gap between actual results and market reaction underscores the opportunity JPMorgan sees in the sector.
Investors will likely monitor upcoming earnings reports and management commentary on AI’s impact to gauge whether the recent selloff represents a temporary panic or a fundamental reassessment of software valuations. The bank’s analysis suggests current pricing may already reflect overly pessimistic assumptions about the sector’s future.
