Chart of the Week

Software has been at the center of the AI disruption debate recently, driven by worries over eroding competitive moats, pricing pressure, eventual commoditization, and potential displacement within the enterprise stack. This is particularly true of application software as generative AI appears to be commoditizing niche Software as a Service (SaaS) offerings. Meanwhile, systems software has remained more resilient given its strategic role in AI infrastructure and cybersecurity.

The chart above demonstrates this nuanced impact within the Software sub-sector. While systems and application software have historically moved in relative sync, a sharp diversion emerged in 2025 as sales growth for application software fell to a 3% year-over-year rate while sales in systems software saw solid, accelerating growth. Looking ahead, consensus estimates support our view that current trends should remain in place.

We recently downgraded the Software sub-sector to neutral as its longer-term enterprise role remains uncertain. We would look for an acceleration in application software’s expected revenue growth as evidence of an inflection point. Until then, we prefer systems over application software, and we are favorable on the Semiconductors and Semiconductor Materials & Equipment sub-sectors given their role in supporting the buildout of AI infrastructure.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Risks associated with the Information Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

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