Software stocks have encountered difficulties in 2023, attributed to shifting investor expectations regarding the impact of artificial intelligence. However, some companies continue to show strong performance.
Decline in Software Market
Salesforce, Adobe, and ServiceNow are among the weakest performers in the S&P 500 this year, each down at least 16%, leading to a combined market value loss of approximately $160 billion. Investors began pulling money from the software and services sector for two consecutive months through June after just one monthly drawdown in the prior 18 months. According to Robert Ruggirello, Chief Investment Officer at Brave Eagle Wealth Management, 'Tech obsolescence can come out of nowhere.'
Positive Examples Among Software Stocks
Despite the overall downturn, companies like Microsoft, Oracle, and Palantir are showing strong performance this year, standing out as leaders in the S&P 500. Investors believe their success lies in actively integrating artificial intelligence into their products and business models. For instance, Meta Platforms is seeing revenue growth as its AI efforts improve ad targeting and user engagement, while Palantir expects a 45% sales increase due to its AI products.
Global Context and Valuation Changes
The need to adapt to intensifying competition is not limited to the U.S. In Europe, companies such as SAP, Sage, and Dassault Systèmes have also felt the negative impact on their stocks. Ruggirello noted that the software industry is feeling the competitive pressure from major players, leading to declining valuations: Morgan Stanley's software basket was trading at a prominent earnings ratio of 23 times projected earnings, lower than the average for the past decade.
The software market situation exhibits mixed results, prompting investors to adopt caution. Some companies that actively integrate artificial intelligence continue to thrive, whereas others face significant losses.
