Why software stocks have 'legs,' upside potential: Strategist

Software stocks are gaining attention as investors identify potential market upside. Victor Cossel, Seaport Research Partners senior macro and equity strategist, joins Market Domination to offer guidance on navigating this sector.

Cossel reflects on the sector's journey, noting that software stocks faced negative sentiment early in the year. Many investors believed that "AI would disintermediate" numerous companies in this space. However, Cossel argues that this sentiment has been "overdone," pointing to the continued strong performance of industry leaders like Salesforce (CRM) and Adobe (ADBE).

Turning to market dynamics, Cossel highlights emerging trends: "We're seeing a lot of familiar reversal patterns in software stocks." He adds, "It's the reversal formation that really caught our attention. The prior consolidation that... springboards to the upside."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

Software stocks could see some up major upside ahead.

That's according to some promising technical signs taking off concerns of A I headwinds.

We're taking a look at how to navigate that trade in the Yahoo finance playbook and joining us now, Victor Cassell, senior analyst, Macro and Equity Strategy at Seaport, research partners.

Uh Victor, it's good to see you.

So you seem to suggest your software has some, some legs here, Victor, what we're seeing in these names uh more than just kind of AAA short term rebound.

Yeah, Josh, I thank you for having me.

Uh Exactly that it's uh it's legs, legs, meaning more than one step here.

The sentiment has been entirely overdone.

Uh There was a period in the first half of the year where the software models were under pressure or at least the perception of investors was that A I would uh disintermediate many of these seat based models and some of these uh seat based models would be shifting to consumption.

Uh We think that sentiment has been overdone and the proof points for that are coming through uh through sales force through Adobe.

And we've also had uh through that sort of consternation in the first half, you've had an expectations reset.

So expectations went really low for software, they're very high for semiconductors.

And now as you get these data points, whether it's operational efficiencies of how software companies are employing A I or how they're monetizing A I.

And in particular, Adobe was kind of our big proof point or inflection point for that.

Uh We think this A I story is rather early on the software side.

And when you go into the back half of the year, you have budget flush, you have uh the fiscal year end for the government.

Uh There's a bit of a seasonal aspect here.

And lastly to your prior guest point about the softening of the economic data points, you have lower yields which uh tilts defensively for the market and software within technology is a fantastic defensive traditionally.

And Victor just given some of the uh technical standpoints that you're closely watching here.

I guess when you see when you lay out that more bullish case for software stocks, what does that upside potentially look like from here?

Yeah, I think you kind of if you look at the range that you can consolidate, which, you know, call it for the uh the proxy that we're using here, the IGV, the software ETF if you have a consolidation range over the last 6 to 9, 12 months of uh 10 to 15% you, you gen generally tend to exit that and have momentum coming out of that.

Our biggest thing as with A I which is pattern recognition technicals are as well, but we're seeing a lot of familiar reversal patterns in uh software stocks, in particular, whether it's their moving averages, whether it's their formations and in particular on IGV, it's the, the reversal reversal formation uh that really caught our attention, the prior consolidation, that kind of springboards to the upside, you know, Victor a lot, there's been a lot of time and money and effort pouring into A I is part of your call here that you think, you know, when it comes to software names in the next 12 months or so, investors will have kind of greater clarity about who the winners and laggards are.

Uh Yeah, I guess that's what makes a market.

Uh Some believe, yes, some believe, no part of the disintermediation is, do you have access as a small company to A I models?

And can you build a product off of that or do you go with the reliable?

And I think the market will probably shift towards the reliable.

If you look at what's working in the market, its market cap its size if you're an enterprise.

And I think this was the proof point coming out of Adobe.

If you're a serious enterprise, customer embracing A I, uh you want to go with your most trusted people sales force is your number one customer front end uh CRM platform.

That's where all the data is.

Their data cloud was up massively uh from a data perspective, it was up 40% from a transactional perspective.

It was up 200% all on year.

The point being is these are my trusted partners.

I'm a real enterprise.

I've got to embrace a transformational change.

Am I going to do it with a start up that might get access to these tools on Aws or Google Cloud?

Or, or do I go with the guys that I already know?

I think it's with the guys that you already know and coming out of Adobe, it was like, oh, do these start ups eat their business?

And Adobe came back and told you, not only are we growing customers, we're retaining customers.

And I think that's really the unwind of negative sentiment uh in software for the back half of the year that uh we're uh we're bullish on.

All right, Victor.

Great to get your insight.

Thanks so much for joining us here today.

Happy fourth.

Hey, happy Independence Day.

Thanks Josh.

Thanks Shana.