Is the new AI trade just software?

A soft start to September after a poor end to August has left the most important part of the stock market — everything related to AI — in a shakier state. The market has been jittery about semiconductors and data centers, but may have just found a new interest.

First, what’s eating the AI trade?

Semiconductors are in a precarious position, with the VanEck Semiconductor ETF not too far away from completing a bearish head-and-shoulders top pattern.

Zooming in on the most important semiconductor stock, Nvidia, the heart, soul, and many other body parts of the AI trade, closed below its 50-day moving average on Tuesday for the first time since May, when it was repairing damage done in the wake of the momentum meltdown and tariff angst that roiled markets.

So that’s the shakiness. But… there is hope.

Software has been something of a laggard in the world of tech over the last year, as investor dollars flocked to the sexiest — and most high-performing — hyperscalers, power providers, and electrical equipment makers poised to profit from the AI data center boom, but a change may be afoot.

Several, let’s just say it, incredibly boring business-to-business data management software companies like Datadog, Snowflake, Autodesk, and Pure Storage have had a bit of a run lately, partly driven by surprisingly strong earnings results.

The Takeaway

Until recently, the rap on software was, essentially, that AI stood to potentially disrupt and undercut the immensely profitable “software as a service” (SaaS) industry. As a Goldman Sachs analyst wrote in a recent note titled, “Updated thoughts on the ‘Death of Software,’” the reality seems to be that large software companies are rapidly embracing AI technology themselves, adopting a hybrid strategy. Given recent fireworks following software companies’ earnings reports, it could be a profitable area for investors to watch.