Software volatility won’t ‘go away’ anytime soon: Citi strategist

00:00 Julie

And you guys were overweight on software coming into this period of time which little little painful, I’m sure, but you know, so do you how do you think about like, do you still call it an overweight on software now when you’re clearly saying not everything is going to do well? So how do how do you kind of define your thinking around it?

00:32 Scott

So so we’re so when we do this and again, looking at the Q4 price action, the software sector over got got very oversold was a relative underperformer. We thought a lot of this was priced in. Obviously, we’ve got hit with another wave of this particularly on the heels of the uh the Microsoft quarter. But what’s happened here is that you’re looking on a one, two, three-year perspective, you’re looking at fairly notable multiple contraction now. So there’s going to be a value component that begins to kick in here as companies are defending their their business models and so forth. So, you know, the overweight’s tricky because we make one quarter calls and so we’ll have to readdress this at the end of Q1, but we think on this setback, we think we’re in a pretty good shape from here is certainly into the end of Q2. What we have been suggesting, Julie is that, again, this issue is not going to go away. The overhang is going to be there. Um so we’re expecting ongoing volatility within the software sector, but we do think that the Q1 earnings season will probably be the next time frame at which we see companies, you know, I think increasingly defending their turf if you will. Last point on this, when we look at software and in our in in terms of our ratings is through an S&P 500 software industry group lens. What I would point out on this and your uh your heat map showed this earlier, Microsoft is over half of the uh of the industry group within the S&P. It’s about 55%. So essentially you have to weigh in on on that one in particular, more or less as it goes, so’s going to go the industry group or the sector, uh the way we think about it through an S&P 500 lens.

02:37 Julie

Gotcha. And we’re showing that heat map again, indeed. So that market cap um is a lot bigger than most of the other market caps. So, point well taken on that. Um, something else I want to ask you about when it comes to software is, um, kind of the AI models that are out there. Um, and I was just looking at just kind of for fun looking at Polymarket odds this morning and you know, which people, which company’s going to have the best AI model at the end of March is one of the bets that’s on there. And you see it’s kind of split but Google right now is in the lead. Obviously that change keeps changing. Anthropic just came out with a new model. Um, does it matter for the software sector which ones of which one of these is going to end up being the dominant model or models?

03:41 Scott

Um, I that’s probably a little bit beyond my paygrade on this particular discussion, but what I would say here is is that, you know, I think we do have to allow and this kind of gets back to a broader AI discussion in terms of how we’re thinking about the the equity landscape. There’s been a lot of talk around this bubble notion. We’ve said, hey, look at there’s as much of a boom thing going on here as anything right now. But what we’ve been arguing for several months now is that you have to allow that this is becoming a much more idiosyncratic playing field, okay? Whether you look at the software sector or whether you look at it more broadly across US equities. The way the AI enablers, um are going to unfold here is going to have its own version of idiosyncracy, if you will. So how you you think about Google, um might be a little bit different than the way you think about meta, the way you think about Broadcom might be a little bit different than the way you think about Nvidia here. So, you know, we think that this is actually an element that gets overlooked in this bubble talk. But what I would allow here to your question is that there’s still the way this is setting up, plenty of room for many actors to survive and prosper in this. So, I think as as we look at at this coming back to the software discussion going forward, we just have to allow that these companies are not going to be, you know, sitting still on this and they’re going to be looking for ways to augment their product product offerings. Time is going to tell in terms of the degree to which they’re able to monetize that augmentation if you will, but it’s going to happen. These are very embedded franchises with very strong margin profiles. Um and you know, I think that there’s there is going to be an element here that yeah, market’s priced in a lot pretty quickly, but as we go forward, we’re going to find out that there’s actually still room for these companies to show pretty persistent growth over the next couple of years.

06:05 Julie

Scott, great to catch up with you as always. Thanks so much.