Beyond the Software Sell-Off: Investing in the AI “Picks and Shovels”

Markets have opened for the last full trading week of February, and one theme this month has been AI disruption.

Various sectors have been hit by concerns over the launch of new AI tools, and these include insurance, real estate, trucking, and wealth management in terms of sectors.

But maybe the impact on the software sector has been the most noticeable.

Adobe, Salesforce, ServiceNow and Snowflake are all down at least 20% year to date.

Now the big question is if software would have experienced a rebalance in evaluations anyway, even if AI disruption fears weren't front and center right now.

Well joining me to weigh in is Jeff Gitterman, managing director for Gitterman Asset Management.

Good morning, Jeff.

Thank you so much for joining us today.

So first and foremost, take us through the sell-off we've seen in software stocks this year, and do you expect it to continue as we head into 2026?

Yeah, I mean, first you had a trigger early in the year when you had a bunch of um AI companies starting to put out programs that were showing that software could be created right through your AI, your chat GBT or your OpenAI, and it started to feel like a big threat against these software as service companies.

Um, that disruption started driving markets down literally back in January.

You saw an acceleration of that as you saw companies putting out, especially in the wealth management industry, tax management software programs coming directly from companies and not from software companies.

So this AI disruption fear, I don't see that going away.

I think you're going to still see these companies, especially as they accelerate their large language learning models, put out more and more programs where companies can do it themselves.

The thing is, I don't see companies doing it themselves that quickly.

This is still an integrated process.

Once a company, especially if you look at the wealth management industry, once they invest in a company that they want to use the service across their platform, those changes don't happen very quickly.

So I think the AI disruption fear is overblown a bit, but on top of it, you have Recalibration of growth expectations.

You had super high growth expectations.

These companies were outperforming the incredible run of the S&P 500.

They were still outperforming it by hundreds of% in some instances, whether it's Palantir or Adobe or other companies.

So I think those growth expectations, especially where you see the Fed not necessarily moving to lower rates as rapidly as people expected at the end of last year.

I think that's a big issue that's reducing the growth expectations on these companies even more than the AI disruption fears.

And Jeff this week we are awaiting Nvidia earnings results as earnings season unwinds, but do you see this as a current buying opportunity when it comes to the drawdown that we're seeing in the sector and how are you playing defense as AI fears spread across market sectors.

Yeah, I mean, we've been talking about this, I think, for the past year with you on regular conversations.

We think playing defense is more in the energy sector because no matter what is happening on the software side, the energy infrastructure buildout for AI to keep up this incredible war race with China, whatever you want to name it, is not going to stop for a while.

So defense. is really in the energy infrastructure, in the grid, in that side, and water stocks where you need more and more water to invest.

We think the profitability concerns are enough without even the AI disruption fears to at least reduce and limit and take some profits in your software side of your portfolio and again invest more in the picks and shovel side of the model.

And Jeff, before I let you go, I do want to ask you a big picture question.

So given a lot of these fears regarding AI's impact, how does this affect your market outlook for the rest of 2026, given the fact that we are only a month two months into the first quarter of the year?

I know in a week we'll be 3 months into the quarter of the year, which is crazy already, but again, we're very hesitant to go heavy on the software side, even the hardware side, Nvidia is going to be there no matter what, because the amount of chips that are needed in this AI race is going to continue, but when you get down to the end products, we're definitely nervous about that side of the.

Market, we think the energy infrastructure side, water adaptation and resilience plays are much more defensive right now and certainly year to date are doing much better than the market.

You're seeing 9 to 10% returns year to date on infrastructure and water and adaptation resilience plays versus the flat to slightly negative.

Side of the NASDAQ in general and even worse, the 20% downside we've seen in software stocks year to date.

So a much safer way to play the markets, especially with all the uncertainties about whether the Fed will reduce rates or not, war with Iran, stuff going on in Mexico now, the war with the cartels.

We think defense is the best play for the rest of the year.

Well, Jeff, always great talking to you.

Thank you so much for joining us on this Monday morning, and I appreciate your perspective.

Thanks for having me on.