Chip Stocks Drop 12% as Software Rebounds in AI Trade Shift

Software stocks appear to be regaining investor attention after months of pressure tied to fears that artificial intelligence could weaken the sector's growth profile. A widely followed software index has advanced 2.2% this month, reducing its year-to-date decline to 12%, while the Philadelphia Stock Exchange Semiconductor Index has dropped 12% in July despite still being up 78% this year and coming off its strongest quarter on record. Bob Doll, chief investment officer at Crossmark Global Investments, said the gap between chips and software had become extreme, noting that he has been adding software exposure while cutting some semiconductor holdings.

Wall Street's tone toward software has also started to improve. Guggenheim upgraded Salesforce NYSE:CRM, a customer relationship management software company, ServiceNow NYSE:NOW, a workflow software company, and Check Point Software Technologies NASDAQ:CHKP, a cybersecurity software company, arguing that while AI could still be disruptive, the most bearish views on the sector may be overstated. HSBC also raised Adobe NASDAQ:ADBE, a software company tied to creative and design tools, to buy from hold, saying investors may be overestimating the damage from AI-based design products. The recent shift suggests investors may be starting to separate software companies with possible AI upside from those that could face more pressure.

At the same time, sentiment toward chip stocks has become more cautious. Samsung Electronics, a major electronics and semiconductor company, delivered a strong earnings report, but the result did not trigger a rally, while a Reuters report that China's DeepSeek is developing its own AI chip helped pressure the semiconductor index by 4.7%. Investors are also weighing whether AI infrastructure spending expectations have become stretched, after Bloomberg News reported that Meta Platforms NASDAQ:META, a social media and technology company, plans to sell access to its cloud operations to companies needing AI computing capacity. That concern has been amplified by Michael Burry (Trades, Portfolio)'s reported short positions in Nvidia NASDAQ:NVDA, a leading AI chipmaker, Applied Materials NASDAQ:AMAT, a semiconductor equipment company, and the iShares Semiconductor ETF, even as semiconductor earnings are still expected to grow 47% in 2027, compared with 16.5% expected growth this year for software and services.