Deutsche Bank Upgrades Software Stocks, AI Disruption Concerns Subside

Investing.com - Deutsche Bank has upgraded its stance on software stocks, citing diminishing concerns over AI disruption and strong profit momentum.

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Analysts Maximilian Uleer, Carolin Raab, and Francesca Mazzali stated that European and U.S. software stocks have performed poorly over the past six months.

“Until the outbreak of the Iran conflict, ‘AI disruption’ caused the European software sector to decline 23% over the past six months, and the U.S. software sector by 19%,” the analysts wrote.

The bank pointed out that the valuation premium of software companies relative to the broader market is at a historic low.

“Current valuations imply that the market consensus believes software companies will no longer outperform the broader market. But the reality tells a different story,” Deutsche Bank said.

In the U.S., the software sector saw a 29% profit growth in the fourth quarter, and expectations for 2026 have also been raised. Analysts noted that profit forecasts for European software are showing signs of bottoming out.

Deutsche Bank added that market narratives have overly emphasized AI-related risks while ignoring potential benefits, including reduced programming costs and product improvements.

“We have yet to encounter any software company that expects AI to negatively impact revenue by 2026,” the report stated.

Therefore, Deutsche Bank upgraded its rating on the technology sector from underweight to neutral and shifted its stance on software stocks within the sector to overweight, indicating that the recent pullback may present buying opportunities.

The bank summarized, “Concerns about AI disruption have peaked,” positioning software stocks as a key area for investors seeking growth by 2026.

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