Dan Ives: AI trade has become the 'fear of the unknown'

The S&P 500 software stock index has recently fallen into a bear market, weighed down by intense selling pressure.

Investors are increasingly worried that artificial intelligence could disrupt the entire industry — and potentially render some software companies obsolete.

In a new report, JPMorgan global investment strategist Kriti Gupta summed up the concern bluntly, warning that “software companies could become obsolete” due to rapid AI innovation.

In fact, after Anthropic recently released a new AI-powered plugin aimed at the legal industry, it sent software as a service (SaaS) plummeting, wiping out about $300 billion in market value in one day.

But on Wednesday, prominent tech analyst Dan Ives of Wedbush pushed back on the "software doomsday trade" in a post on X, comparing it to other "disconnected tech trades" that he has seen during his 25 years working on Wall Street.

Ives pointed to when Microsoft Corporation (MSFT) entered the cybersecurity space in the mid-2000s and investors feared that it "was going to wipe out the cyber industry." Instead, "cyber security has become pervasive among enterprise spend" for companies across the globe.

He also recalled when the “chip industry was going to be dominated by Intel a decade ago with smaller players like Nvidia (NVDA) at the time essentially an afterthought only good at gaming chips.”

With Intel Corporation (INTC) seen as the dominant player, "the market would give minimal respect to the likes of AMD (AMD), Nvidia, and others."

"The rest is history with the Godfather of Al Jensen (Huang) and Nvidia now the one chip fueling the Al Revolution and Intel playing major catchup," Ives said.

And he also noted that people saw cloud computing as a major threat to the business models of Microsoft and Google (GOOG) because Amazon (AMZN) and AWS were so far ahead of their competitors.

"Instead over the years this has become one of the biggest creators of value and monetization for both tech stalwarts and now puts them in pole position on the Al Revolution front," Ives said.

What he sees now is an "AI is a threat to every industry narrative" with software seen as the most vulnerable. Ives said the AI trade has now become "the fear of the unknown" for investors, especially as it comes to software, but also tech in general.

“For the bulls it's like fighting a ghost in a dark closet, as the numbers today cannot prove monetization yet for tech players while the cap-ex dollars approach $700 billion this year alone,” Ives noted.

He said that the "fictional concept" that's being debated in the markets right now is whether AI will essentially render enterprise software and cybersecurity useless, as investors see companies potentially slashing 70% of their IT budgets because of new tools being offered by Anthropic, OpenAI and others.

But “the reality is dramatically different as the complexity of enterprises today makes this a nearly impossible task,” Ives said.

“The stacks of data, processes, security, organizational structure, IT architecture, and vital role of the software layers have become the hearts and lungs of modern enterprises,” he added. “Software, cyber security, and IT infrastructure will be key pillars of the future of the Al Revolution in our view.”

JPMorgan's Gupta said in her report that investors are using a "broken logic" when it comes to software stocks because the "market is selling indiscriminately," including the "stocks that should benefit from the disruption.

This includes the hyperscalers that invested early in AI technology, chipmakers fulfilling demand from the infrastructure build and even the materials needed for the process."

While Ives acknowledges that many AI companies can't currently show that enough enterprises are buying their AI agents and platforms that would likely ease concerns of a bubble, "in the next 12 to 18 months this will be a software led tidal wave of spending given the timing of many of these use cases and Al deployments," he said.