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Key Takeaways
- Morgan Stanley analysts said they believe investor sentiment around software stocks has become “too negative” lately, amid concerns about AI-driven disruption.
- The analysts suggested a number of software stocks could be primed for gains, with “more opportunities than investors currently believe.”
A number of software stocks have had a tough time lately. That could leave some high-profile names primed for a rebound, according to Morgan Stanley.
The S&P 500 software industry index has dropped more than 25% from its highs last October as many investors trimmed their holdings in the sector amid worries about AI-driven disruption. America’s largest software exchange-traded fund, the iShares Expanded Tech-Software Sector ETF (IGV), is down 13% this year so far, compared to the S&P 500’s close to 10% gain over the same period.
“We think the market has become too negative,” Morgan Stanley analysts wrote in a note to clients Tuesday, saying that they believe “there are more opportunities than investors currently believe.” Here are some of their top ideas for ways investors could play a rebound in the sector.
Key Takeaways
Worries about AI have weighed on the software sector this year. Morgan Stanley is suggesting some of these fears could be overblown.
Microsoft (MSFT), which has seen its stock lose nearly a fifth of its value year-to-date, making it the weakest-performing Magnificent 7 stock of 2026 so far, was one of Morgan Stanley’s picks. The software giant was the “highest quality” choice Morgan Stanley screened, based on its competitive moat and near-term growth potential, according to the analysts. Their price target of $600 for the stock would suggest 50% upside from Tuesday’s close and is a bit above the analyst consensus compiled by Visible Alpha around $550.
Morgan Stanley highlighted cybersecurity providers Palo Alto Networks (PANW), CrowdStrike (CRWD), and Cloudflare (NET) as well. Unlike Microsoft, these stocks have surged in recent weeks, marking a rare bright spot in the industry, with all three stocks hitting record highs earlier this months as worries about AI risks grow. “Cybersecurity should benefit across a multi-phase AI investment cycle,” the analysts wrote, anticipating that growing adoption of AI and attacks using the technology would raise the need for security services.
The analysts also said they see data platform Snowflake (SNOW) benefitting from the need to “modernize data and prepare for AI workloads,” along with ServiceNow (NOW) and Datadog (DDOG), identifying them as “enterprise workflow and observability leaders.” Commerce platform Shopify (SHOP), which is down nearly 25% for 2026, rounded out the list on expectations its AI assistant “Sidekick” could give the company “one of the shortest journeys to monetizing AI.”
Read the original article on Investopedia
