``` AI panic has crushed software—but was the market actually wrong? ```

``` AI panic has crushed software—but was the market actually wrong? ```

Recent market panic over artificial intelligence potentially disrupting the traditional software industry has led to heavy losses in related sectors. However, the latest analysis from mainstream Wall Street institutions points out that such sell-offs may be severely exaggerated. HSBC refuted the notion of "AI replacing software" in its latest report, arguing that this debate is itself logically flawed. Software vendors are expanding their total addressable market (TAM) by embedding AI technology, rather than being replaced by it.

In this market turmoil, the software and services sector has faced the most severe valuation corrections. According to data from Morgan Stanley, the market sell-off has been both intense and indiscriminate, with many fundamentally sound, high-quality business model companies suffering across-the-board hits. The bank noted, some companies misjudged by the market as "disturbed by AI" are in fact facing huge opportunities for valuation recovery.

Meanwhile, data from Goldman Sachs shows that the software industry's valuation has undergone a dramatic correction. Just a year ago, the software sector topped the stock market with a price-to-earnings (P/E) ratio of 51 times, while now its P/E has dropped to 27 times—not only no longer the most expensive sector, but even lower than media, automotive, semiconductors, and capital goods sectors. This indicates that the market has likely overreacted in its pricing of AI's negative impacts.

Institutions generally believe that, the initial impact of AI on enterprises is more about cost efficiency rather than income growth. Morgan Stanley's survey shows that 74% to 90% of analysts believe AI will boost profit margins through cost savings in the next 12-24 months, while only a minority expect significant acceleration in revenues. This suggests that software companies able to effectively integrate AI to improve efficiency have not seen their real profitability damaged, but may be enhanced instead.

AI enhancement rather than replacement: HSBC's logic

Regarding the debate over "whether AI can replace AI software," HSBC put forward a counterargument, stressing that software vendors are embedding AI into enterprise applications to provide complementary value. HSBC pointed out, core software functions will be augmented by AI rather than replaced. Large enterprise software giants (such as SAP, Oracle) have built decades-long moats through control of private customer data, deep domain expertise, and optimized code—which gives them an advantage in enterprise systems over pure AI-generated solutions.

Furthermore, HSBC emphasized the current technical limitations of AI in enterprise-grade applications. AI’s "hallucination" problem and non-repeatability make it unable to meet the strict requirements for accuracy in core corporate systems. While the media’s echo chamber effect continues to hype a narrative of "AI versus software," AI integration among the Global 2000 is driving rapid TAM growth and cost efficiency, and AI features embedded in legacy platforms are opening up new revenue streams.

Adopters' windfalls and the dilemma of the disrupted

Morgan Stanley data reveals a widening performance gap between AI adopters and those perceived as disrupted. Since the end of 2023, the "adopter" group that actively embraces AI has seen profit revisions 102% higher than the "disrupted" group. The former not only saw stronger upward earnings revisions, but also a much faster expansion of EBIT margins compared to the MSCI World Index.

By contrast, companies tagged by the market as "disturbed by AI" are facing rating downgrades and margin pressure. This indicates the market is shifting from mere AI hype to focusing on measurable ROI and profitability. Morgan Stanley points out that although revenue growth from AI is mainly concentrated in sectors enabling AI infrastructure like data centers, 89% of AI adopters expect to benefit mainly through efficiency gains.

Valuation mismatches and trading strategies

Against the backdrop of irrational market sell-offs, major banks have begun adjusting strategies to capitalize on these mismatches. Deutsche Bank believes the software sector is overly discounted for AI risks and notes that its share prices have fallen by more than 20% and valuation multiples have compressed 21% this year. Using GenAI resilience scorecard and valuation metrics (such as GAAP EPS/free cash flow), the bank identified attractive buy opportunities including CLBT, CRM, INTU, and NOW.

Goldman Sachs has launched a pair-trading strategy (Long/Short) for the software sector. This strategy recommends going long on structurally protected software companies that empower AI, while shorting those whose workflows are increasingly susceptible to AI automation or internal restructuring. Since 2023, companies in the long basket have doubled sales, while those in the short basket have seen sales stagnate. Goldman predicts that as companies with AI leverage and defensive attributes recover from recent sell-offs, this polarization trend will persist.

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