Software at the sharp end of equity rotation

Highlights: Global markets have seen a sharp correction in software stocks as investors reassess the pace of AI adoption, elevated valuations, and rising bond yields, prompting a rotation away from high-multiple growth names toward more cyclical and defensive sectors. While concerns around AI disrupting traditional software models have weighed on sentiment, we believe AI will ultimately complement rather than replace core enterprise platforms, with infrastructure and mission critical systems remaining structurally resilient.

• Recent market volatility in software stocks has been driven by growing concerns over whether artificial intelligence could disrupt traditional software business models. While sensational commentary has fuelled fears that AI may “replace” software, our view is that this debate is fundamentally flawed. In most enterprise settings, AI cannot operate effectively in isolation. Instead, it depends on robust software platforms to manage data, ensure security, integrate workflows, and convert insights into actionable outcomes. As a result, while certain user-interface driven and single-function applications may face pressure, core enterprise platforms and infrastructure software remain essential to digital ecosystems
• We see the correction in selective software stocks as opportunities to selectively build exposure to high-quality companies that can successfully combine AI innovation with sustainable earnings growth, rather than a harbinger of overwhelming tech disruption. At the same time, market leadership has broadened, supported by fiscal spending and improving earnings momentum in Materials, Industrials, and Utilities, where we remain mildly overweight. We continue to favour US equities for their earnings strength, while actively managing concentration risk through regional, sectoral, and multi-asset diversification
• Looking ahead, we believe software vendors are well positioned to remain central to the AI adoption cycle. Rather than being displaced, leading software companies are likely to be the primary architects of AI enabled solutions, embedding intelligence across applications and expanding their addressable markets. Our portfolio positioning reflects this view, with a focus on high-quality platforms, resilient business models, and diversified sector exposure. Also, to mitigate concentration and valuation risks in US Big Tech stocks, we continue to focus on our Q1 Priority of “Look across and beyond AI for equity returns”