Choosing the winners in the artificial-intelligence race is only getting tougher. Earnings season has complicated what had looked like a broad rotation into software rather than hardware, and investors might want to reconsider whether they can really time the AI shift.
Markets have been waiting for value in AI to move away from component suppliers and toward software companies integrating technology successfully. A shock to highflying infrastructure names–intensified by the forced sale of stocks by AI-focused hedge fund Situational Awareness–gave another boost to that narrative this summer.
There is some reason to believe in the software revival. Companies including Atlassian, Cloudflare, and JFrog soared this week after their earnings impressed the market. Each has an explanation for AI helping rather than hurting its business. Never mind sector darling Palantir Technologies, which surged 30% higher Tuesday on huge revenue growth while taking potshots at OpenAI and Anthropic for dreaming of dominating the global economy.
Still, the results of going all-in on software this earnings season would have been decidedly mixed. For every Cloudflare or Palantir, there was a HubSpot or Datadog that sank. The iShares Expanded Tech-Software Sector ETF is up 10% since the start of July. That’s better than the PHLX Semiconductor Index’s 15% drop over the same period but hardly makes up for its underperformance over the longer term in the AI era.
It’s extremely hard to stay on top of the AI software game. Just ask Google-owner Alphabet, which has gone from being praised as a leading model developer to feeling the need to radically shake up its AI research team in a matter of months.
Staying alert to AI developments is smart, but betting on a software comeback too early can be just as damaging as arriving too late.
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