The panic around artificial intelligence destroying the software industry might be a bit much. That's the message from JPMorgan, which thinks Wall Street has gotten carried away with apocalyptic visions of AI agents replacing every software company overnight.
Here's the thing: yes, AI is real and powerful and changing how we work. But the idea that it's going to instantly obliterate decades-old enterprise software businesses with sticky customers and multi-year contracts? JPMorgan's strategists aren't buying it.
"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," said Dubravko Lakos-Bujas, Head of Global Markets Strategy at the bank.
In a recent analysis, the team argued that markets are pricing in near-term AI disruption at levels that look pretty unrealistic when you dig into the details. The "extreme price action" in software stocks has created what they see as an opportunity, particularly in higher-quality names that have actual defenses against AI-related upheaval.
The Resilient Nineteen
JPMorgan calls out 19 companies it views as relatively shielded from the AI threat. Leading the pack are Microsoft Corporation (MSFT) and CrowdStrike Holdings, Inc. (CRWD), which the bank sees as AI-resilient not because they're immune to change, but because they're positioned to actually benefit from AI-driven workflow improvements. These businesses have built moats around their enterprise customer bases. High switching costs and multi-year contracts make it really hard for customers to just walk away, even if some shiny new AI tool comes along.
The other 17 names on JPMorgan's list include Twilio Inc. (TWLO), Okta Inc. (OKTA), ServiceNow Inc. (NOW), Palo Alto Networks Inc. (PANW), Zscaler Inc. (ZS), Check Point Software Technologies Ltd. (CHKP), SentinelOne Inc. (S), Snowflake Inc. (SNOW), Datadog Inc. (DDOG), Veeva Systems Inc. (VEEV), Guidewire Software Inc. (GWRE), CoStar Group Inc. (CSGP), Tyler Technologies Inc. (TYL), JFrog Ltd. (FROG), SailPoint Inc. (SAIL), Netskope Inc. (NTSK), and Q2 Holdings Inc. (QTWO).
What Sparked the Selloff
Software stocks have been getting hammered lately, and the catalyst has been a wave of new AI tools that spooked investors into thinking traditional software-as-a-service businesses might be headed for obsolescence. The selloff really picked up steam after AI developers released fresh models that raised the specter of systems capable of handling tasks like coding, data analysis, and expense tracking. You know, the exact things that existing enterprise software does.
The decline pushed the sector deep into oversold territory. The S&P software index officially entered bear market territory, which is when you know things have gotten grim.
But according to Kriti Gupta, JPMorgan's Global Investment Strategist, the selling has been way too broad and indiscriminate.
"The market is selling indiscriminately," she said, pointing out that even companies expected to benefit from AI infrastructure demand got swept up in the carnage alongside traditional software names.
Gupta thinks the reaction reflects a repricing driven by fears that agentic AI could eventually make certain software products obsolete. Fair enough. But she also highlights a key countertrend that's getting lost in the panic: corporate adoption of AI is already improving profitability for the companies using it.
Companies in the S&P 500 that are actively using AI have seen net margins expand by roughly 2 to 3 percentage points more than their peers and the broader index. That suggests the technology is already delivering real productivity gains, not just theoretical disruption risks.
So what we have here is a classic case of markets pricing in the worst-case scenario while ignoring the evidence that many software companies are actually adapting and benefiting from the AI wave. JPMorgan's bet is that as the dust settles, investors will recognize that software businesses with strong fundamentals, loyal enterprise customers, and the ability to integrate AI into their own products aren't going away anytime soon.
The rotation back into quality software names could be one of the more interesting trades as 2025 unfolds, especially if the panic selling proves to have been overdone.
Price Watch: The State Street SPDR S&P Software & Services ETF (XSW) is down 20.58% year-to-date, reflecting just how brutal the sector selloff has been.
