Software vs. Semiconductors: Can Software Survive AI?

Thomas Shipp | Head of Equity Research

Last Updated: January 29, 2026

Additional content provided by Tucker Beale, Analyst, Research.

As AI tools continue to improve, concerns have grown that software as a service (SaaS) customers will be less interested in legacy offerings and instead leverage newfound AI capabilities in their place. Why do I need to pay for software, the thinking goes, if internal development of these systems now takes developers less time with AI? Furthermore, with the release of offerings like Anthropic’s Claude Cowork, an application with access to read and edit files, less technical users are now empowered to replace existing workflows. These concerns have worsened recently, and AI enthusiasm has spurred semiconductor stocks higher, crowding out investments in software names. The result has been a large performance dispersion within the technology sector between the software and semiconductor industries.

Software Has Lost Ground to Semiconductors

Source: LPL Research, Bloomberg 01/27/2026
Disclosures: Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested in directly.

As a result of the dispersion in price action, the software subsector is now trading at a discount relative to the semiconductor subsector. The Russell 1000 semiconductor subsectors index is trading at 43.6x forward earnings, while the Russell 1000 software subsector index is trading at 32.4x forward earnings. Semiconductors are essential for AI and for all the technology we interact with daily, but their manufacturing is a cyclical business.

Historically, demand for chips has spurred increased production capacity that ultimately leads to overproduction and falling prices before the cycle repeats. While AI has likely created a super cycle, ultimately this cyclicality is not something we would expect to change in the future, and therefore their valuations eclipsing software feels like a bit of a dislocation. For context, the software business has been one of the best businesses historically. It is inherently scalable, as once software has been developed, there is a very low incremental cost each time it is sold, and the business is largely based on subscriptions that are predictable and therefore easy to model. Traditionally, these types of businesses would command a premium valuation and could again in the future if they are not completely displaced by AI.

Mass cancellations of enterprise software contracts in the short to medium term seem unlikely. In a recent webinar with analysts and IT executives, JPMorgan discussed how it is not abandoning enterprise software because of AI. AI tools are being used, but adoption is practical and gradual as opposed to outright disruptive. For large firms, a more realistic goal is to leverage AI tools to make existing users more productive, not to replace systems. The dream of giving agentic tools read and write access to the files used to run large enterprises seems far away and fraught with risks and data privacy concerns. This should help to put some floor under the beaten-up software names.

That said, software companies that are not a system of record do have some risk of displacement as they may be more of a “nice to have” or feature enhancer in the future. Most, if not all, software producers, will need to offer their own AI enhancements to maintain their market share going forward. Further down the road, a slowdown in user counts is a risk if generalized AI tools put a lid on knowledge worker employment growth.

Technically, it is hard to argue with the longer-term relative strength of semis. However, we see the potential for software to rebound relative to semis in the first quarter. The software‑to‑semis ratio is deeply oversold and approaching a key support level. The magnitude of the current drawdown is similar to past points where the trend has reversed, and the pair now trades at its widest discount to the 40‑week moving average since 2021. In short, while we acknowledge the established leadership of semis, the technical setup suggests software may be nearing an important inflection point in relative performance.

The Strategic and Tactical Asset Allocation Committee (STAAC) maintains a neutral weight recommendation on the technology sector. The sector boasts a positive relative trend and has been on the shopping list as an opportunity for a potential upgrade. The sector is experiencing very strong earnings growth alongside strong margins, which help to justify high sector level valuations, and a snapback in software names (which make up around a third of the sector) could be a catalyst for an upside surprise.

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Thomas Shipp

Thomas Shipp leads the Equity Research team at LPL Financial, which provides insights driven from quantitative and fundamental equity research.