The S&P 500 slipped 1.39% this week, and the Nasdaq Composite fell still further, ending the week down 2.10%. Software stocks helped lead the indexes lower, as worries over whether AI would render many forms of software redundant maintained their presence on investors' wall of worry.
As Fundstrat Head of Research Tom Lee put it, the story of "software eating the world," which we read repeatedly from 1980-2025, is now becoming one of "AI eating software." Yet this shift, to Lee, signals that AI is productive and has a payoff. "To us, [the carnage in software] argues that AI’s biggest impact in the U.S. is ultimately less inflation. Because if there are fewer workers, less software and services spend, but the same output, this is both productivity-enhancing and disinflationary."
From a technical analysis perspective, Head of Technical Strategy Mark Newton acknowledged that "software has struggled to stabilize and find a bottom, [and] they look like they're going straight down in the short run." Going forward, Newton told us that "I don't sense it's going to be an area to overweight within technology."
As he told us during our weekly huddle, however, the situation does not necessarily look so dire for those with more of an intermediate-term timeframe. "The intermediate-term charts help to put this deterioration into perspective," he suggested, and "I do sense that this group can bounce."
Regardless of one's views on Kevin Warsh, President Trump's choice to succeed Jerome Powell as chair of the Federal Reserve, Newton noted this that the changeover to a new Fed chair has historically tended to be followed by market uncertainty and short-term drawdowns. Newton also sees a seasonality challenge. "The second year of a second term of a president has tended to coincide with challenging years for stock investors," he pointed out, a pattern that has largely held true going as far back as Harry S. Truman's second term.
For the most part, this independently coincides with Lee's view. As he reiterated this week, Lee said, "We still think markets have enough tailwinds to get to 7,300, and then we do think there's likely to be a drawdown that feels like a bear market this year. And then year-end we do finish stronger, in my view."
Sector Allocation Strategy
What is Fundstrat Direct?
Fundstrat Direct is a market-leading, independent research boutique. We are experts in U.S. macro market strategy research and have leveraged those fundamental market insights to become leading pioneers of digital assets and blockchain research.
Tom Lee's View
Proprietary roadmap and tools to navigate and outperform the equity market.
Macro and Technical Strategy
Our approach helps investors identify inflection points and changes in equity leadership.
Deep Research
Our pioneering research provides an understanding of fundamental valuations and risks, and critical benchmarking tools.
Videos
Our macro and crypto videos give subscribers a quick and easy-to-understand audiovisual updates on our latest research and views.
US Policy Analysis
Our 40-year D.C. veteran strategist cuts through the rhetoric to give investors the insight they need.
