U.S. chip stocks thrived during last year's artificial intelligence investment frenzy but have faced setbacks in 2024, as investors shift focus to software companies in pursuit of the next AI innovations. Tariff volatility and the rise of cost-efficient AI models from China have redirected attention away from semiconductor shares. Analysts anticipate software will continue to gain prominence in the AI landscape, emphasizing its pivotal role in AI infrastructure.
David Russell, global head of market strategy at TradeStation, notes a shift in investor interest towards long-term opportunities, following last year's semiconductor outperformance and trade restrictions. The Philadelphia SE Semiconductor index has declined by 5.6% this year, while industry leader Nvidia has dropped nearly 13%. Conversely, software companies like Atlassian, CrowdStrike Holdings, Palantir Technologies, and Cognizant have seen notable increases in their stock values, with some software ETFs experiencing inflows.
Adam Turnquist from LPL Financial describes the shift towards software as a natural evolution of AI investing, driven by software's central role in AI utilization. Morgan Stanley echoes this sentiment, favoring software companies as AI technology adoption grows. The performance divergence of software and semiconductor stocks in 2024 underscores this trend, with software companies already seeing gains from the increased utilization of AI technology.
While some see software companies as more promising investment opportunities due to AI technology adoption, concerns linger about the sustainability of semiconductor growth rates seen in 2024. Brian Mulberry from Zacks Investment Management highlights how competition can impact profits for AI and enterprise software companies compared to direct-to-consumer markets. Despite uncertainties, some investors remain optimistic about the long-term potential of software applications in the AI sector.
Analysts recognize Palantir, Microsoft, Oracle, and Salesforce as top choices for software investments, although their performance varies in 2024. Palantir has surged, while Microsoft and Salesforce have experienced declines amid broader U.S. stock market volatility and delayed AI impact on corporate finances. Valuations for software giants like Microsoft and Oracle remain high, signaling ongoing investor confidence in their future growth prospects.
Reflecting on the market dynamics, Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, emphasizes the importance of applications over hardware, underscoring the continued evolution of AI investment strategies.