Recently, the U.S. software sector has faced continued pressure, drawing widespread market attention. However, Dan Ives, a Wedbush analyst dubbed the “tech bull flag bearer” by the market, offers a different perspective. He believes the current sell-off represents the “most disconnected” tech trading he has witnessed in the past 15 to 20 years. Data shows that the iShares Expanded Tech-Software Sector ETF (IGV) has fallen 19% so far this year, while the S&P 500 has only dipped a marginal 0.4% over the same period.
Ives points out that concerns about artificial intelligence (AI) disrupting traditional software companies have been severely exaggerated, leading to what he calls an “AI ghost trade” that has unfairly punished the entire software sector. He emphasizes that for companies from Salesforce (CRM) to ServiceNow (NOW), and in the cybersecurity space, CrowdStrike (CRWD) and Palo Alto Networks (PANW), the use cases are what truly matter. He believes the real value of AI lies within mature software platforms, not the pure-play AI companies themselves. Recent advancements in AI agents by the company Anthropic could even signal a bottom for software stocks.
Ives further explains that while AI might impact some pure-play software vendors reliant on single products, the true data and value reside within the tech stacks and massive installed bases of large software companies like Salesforce, ServiceNow, Workday, and Oracle. He predicts that 30% of future AI spending will ultimately flow to these software firms, with Palantir (PLTR) already demonstrating its monetization potential. He even uses the market sentiment – quipping that “even taxi drivers in Miami are bearish on software” – as a contrarian indicator, suggesting it’s actually a bullish signal for the software sector.
As early as February, Ives’ analyst team at Wedbush noted that the market’s pricing of AI risks already implied extreme assumptions of “widespread industry disruption by AI,” which are completely detached from reality. They believe enterprise clients are far more cautious about migrating to AI than the market assumes. Most companies are unwilling to expose core data to unproven new platforms just to chase AI dividends, nor will they easily abandon the software infrastructure built at immense cost over past decades. The current software ecosystems within large enterprises contain trillions of data points, and emerging AI companies like OpenAI and Anthropic will struggle to fully take over in the short term regarding data capacity and enterprise-grade security. Therefore, AI is more likely to integrate into existing software platforms as an “embedded tool.” Wedbush also listed its top five software stocks to hold during the “software winter”: Microsoft (MSFT), Palantir, CrowdStrike, Snowflake (SNOW), and Salesforce.
Beyond Wedbush, NVIDIA (NVDA) CEO Jensen Huang has also dismissed concerns that AI will replace software tools. He believes the fear that AI will diminish the importance of software companies is “illogical.” The development of AI will continue to rely on existing software tools rather than rebuilding everything from scratch. Similarly, strategists at JPMorgan pointed out that while the long-term question of whether traditional software companies will be replaced by AI remains unclear, the current market pessimism appears to be an “overreaction.” They argue that companies like Microsoft and CrowdStrike possess AI resilience and stand to benefit from enhanced workflow efficiency. The high switching costs associated with enterprise software and multi-year contracts also provide a buffer for these companies against short-term shocks.
