Investors Shift Focus from Semiconductors to Software Amid AI Market Shifts

Investors are moving money from semiconductors into software and other parts of the AI trade that investors expect to outperform. Software companies are starting to look more attractive after sharp declines earlier this year.

First Eagle Investments portfolio manager Manish Gupta added to Workday early in this year's software sell-off. Workday shares fell about 40% in the first quarter of 2026. Workday shares traded at less than three times revenue at various points during that quarter. Workday shares subsequently surged more than 55% in the third quarter. Workday shares rose more than 2% this week amid a broader technology sell-off as investors sought safer assets.

Gupta attended Workday's analyst day this week and remains confident in the company. Gupta said Workday trades at a discount to similar businesses in private markets. Gupta said Workday's business has improved and the shares remain attractive despite the price increase. Workday is a top 10 holding in the First Eagle Global Fund, which Gupta co-manages. The fund, with ticker SGENX, had nearly $75 billion in total net assets as of September 30.

Investors increasingly fear a challenging stock market in 2027 because of a potential slowdown in AI capital spending, anticipated equity supply from major technology IPOs and a ballooning U.S. fiscal deficit. Those factors, together with higher inflation and rising interest rates, could pressure the market and the economy. Investors are betting that mega-cap companies and infrastructure software companies are among the groups best positioned for those challenges. Wells Fargo chief equity strategist Ohsung Kwon said earlier this month that AI applications could outperform the AI infrastructure build-out in 2027. Kwon favored hyperscalers and infrastructure software over semiconductors.

The Roundhill Magnificent Seven ETF, with ticker MAGS, gained more than 6% over the past three months. The iShares Expanded Tech-Software Sector ETF, with ticker IGV, climbed more than 13% over the same period. The S&P 500 advanced 2.7% during that period. However, the iShares Semiconductor ETF, with ticker SOXX, fell more than 4% over the past three months. SOXX declined for an eighth consecutive session on Thursday, the longest losing streak since a nine-day decline in May 2006.

IGV tumbled 24% in the first quarter as investors worried that AI agents could replace software packages sold by many companies. Those obsolescence concerns have largely receded as strong earnings expectations, new AI products and partnerships revived investor confidence. Software companies still face major changes as interfaces shift from screens that users click through to AI chatbots. Bank of America Securities research analyst Tal Liani said the shift toward AI interfaces would benefit companies that already own users' platforms and daily productivity hubs, including Microsoft's Word and Teams. Microsoft regained a $4 trillion market capitalization this week. ServiceNow can manage workflows between human resources and IT even when tasks involve an outside chatbot such as Claude.

Investors remain confident that stocks could continue rising through the rest of this year and next because of strong underlying fundamentals. The current third-quarter earnings season is expected to confirm that strength. However, mounting challenges are prompting more defensive positioning as investors worry that the eventual end of the AI capital spending cycle could reduce some exceptionally high valuations.

Kwon expects AI spending to peak in 2027 and remain flat in 2028. That slowdown could benefit hyperscalers as those companies become more disciplined. However, the slowdown could make data center projects less attractive. Kwon said Kwon became cautious in September in anticipation of a reset in market expectations. Kwon said that reset could trigger a 5% to 10% market decline even by the end of the year. Kwon said investors are starting to consider how the AI spending cycle will end.