AI is entering a new phase that could redraw the investment map of the tech industry, with Eclipse's Joe Fath arguing that the real opportunity is shifting beyond software into capital-heavy "physical AI" — even as markets remain divided on how deeply AI will disrupt incumbent software giants.

AI Disruption Expands Beyond Software

The former portfolio manager of the T. Rowe Price U.S. Growth Stock Fund described AI as a defining technological shift, comparable to the transitions from mobile to cloud.

Speaking on CNBC on Monday, Fath said the industry is moving from "disembodied AI," popularized by tools like ChatGPT, toward "physical AI," where software integrates with real-world systems. He sees this shift unlocking new industrial applications across sectors.

AI Firms Pressure Software Giants, But Debate Continues

AI players like Anthropic are challenging traditional firms such as Microsoft Corp (MSFT), Salesforce, Inc (CRM), and Thomson Reuters Corp (TRI) by launching tools that compete with core software functions, triggering market sell-offs.

Futurum Group tech equities analyst Rolf Bulk warned during a CNBC interview in February, "There's likely to be cannibalization of SaaS by AI-driven workflows and that will impact the multiple the sector trades on." However, Nvidia Corp (NVDA) chief Jensen Huang pushed back, saying, "It is the most illogical thing in the world," arguing AI will enhance rather than replace software.

Meanwhile, JPMorgan strategists Dubravko Lakos-Bujas told Reuters in February that markets are overpricing risks, noting, "The market is pricing in worst-case AI disruption scenarios that are unlikely to materialize over the next three to six months," while Morgan Stanley global director of research Katy Huberty added the sell-off is "sentiment-driven, not fundamental."

Capital Shifts Toward Physical AI And Industrial Bets

Fath said investors are moving away from software-as-a-service toward capital-heavy sectors such as robotics, defense tech, semiconductors, and space. He highlighted that capital, talent, policy, customer demand, and technology are converging to drive this shift.

Even as AI firms disrupt pricing and business models, Bulk noted that entrenched players like Oracle Corp (ORCL) and ServiceNow, Inc (NOW) are likely to coexist with AI due to their deep integration in enterprise systems, reinforcing a more nuanced outlook for the industry.

Price Action: Shares of Microsoft rose 1.56% to $376.67, while ServiceNow surged 5.16% to $87.28. Thomson Reuters gained 2.24% to $85.13, and Salesforce advanced 3.59% to $170.87 as of Monday's publication, according to market data.