The Software Apocalypse
Why the market is panic-selling tech monopolies and where smart dividend investors are finding gold.
If you look at the stock market recently, you might notice a stark divide. On one side, physical businesses like Costco COST 0.00%↑, Coca-Cola KO 0.00%↑, and Walmart WMT 0.00%↑ are hitting all-time highs. On the other, the software sector is being decimated.
Look at the performance difference on a YTD basis below:
We aren’t just talking about speculative startups. Large-cap companies like Microsoft MSFT 0.00%↑, Adobe ADBE 0.00%↑, and Amazon AMZN 0.00%↑ are seeing their valuations slashed.
The narrative driving this sell-off is simple. “A rotation out of tech is happening” But for the savvy dividend investor, this panic might be creating the buying opportunity of the decade.
The Narrative: Why Software is Bleeding
The market is currently gripped by a specific fear. Artificial Intelligence is advancing so rapidly that it will render traditional software and “knowledge work” companies obsolete.
The timeline of AI development is undeniably staggering. Just to demonstrate how rapidly AI is advancing, here is a quick timeline of relevant milestones:
In 2022, AI struggled with basic arithmetic.
In 2023, it struggled to create videos. AI videos were very easy to detect.
By 2024, it was passing bar exams.
Today, we have models that can write the majority of code for software engineers and even debug themselves.
This trajectory has spooked investors into believing a few key things:
Coding is dead. Why pay for expensive Salesforce licenses if your internal team can build custom tools with AI for free?
Creativity is automated. Why subscribe to Adobe’s Creative Cloud when AI image generators can create marketing assets instantly?
Analysis is free. Why pay Moody’s or S&P Global for financial reports if an AI agent can analyze a balance sheet instantly?
Services are obsolete. Why hire a tax pro using Intuit software if AI can digest your tax documents and file them for you?
These are all very fair questions given the climate.
As a result, money is fleeing any company with high capital expenditures on AI or exposure to AI disruption. It is flowing into “safe” physical businesses that AI cannot touch because ChatGPT cannot cook a steak or fly a plane. Hence, many of the high quality dividend growth companies are now rising. Many of the REITs are now rising. These are the same businesses that make up our foundational stocks.
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The Flaw in the Panic
While the advancement of AI is real, the market’s reaction is likely an overcorrection. This is where the opportunity lies.
The market is pricing these stocks based on a narrative of total displacement. It is ignoring the reality of their earnings and competitive moats. Many of these companies are still growing revenue and earnings, yet their stock prices have collapsed by 30%, 40%, or even 70% in some cases.
For dividend growth investors, this disconnect offers a chance to buy high-quality monopolies at a discount.
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Where to Look: The “Data Moat” Opportunity
The most attractive opportunities right now are likely in the companies that own proprietary data.
Take S&P Global SPGI 0.00%↑ and Moody’s MCO 0.00%↑ as prime examples. These stocks have been hammered because investors fear AI will commoditize financial analysis. However, this view misses a critical detail. AI models can only analyze data to which they have access.
Proprietary Data: These companies own massive libraries of private, non-public data that AI models cannot legally train on.
Trust Factor: Billion-dollar institutions require standardized, trusted ratings. They are unlikely to fire S&P Global in favor of a “hallucinating” chatbot.
AI as a Tailwind: Management at these firms argues that AI will actually increase retention. By integrating AI tools, they can offer clients better insights faster. This justifies price increases and strengthens their “moat.”
While the market panic sells, S&P Global management is doing the opposite. They are initiating a $1 billion share buyback. They see value where the market sees a ghost.
The Value Play: Meta Platforms
Another area of opportunity lies in the “Capex Spenders.” These are companies spending billions to build the AI infrastructure. Meta Platforms META 0.00%↑ (Facebook/Instagram) has been punished for its massive spending, but the valuation tells a different story.
Currently, Meta trades at roughly 22x forward earnings. This is a valuation similar to the S&P 500, despite growing significantly faster. If you strip out the losses from their “Reality Labs” (Metaverse) division, the core advertising business is even cheaper, trading around 18x earnings.
This is why I’ve previously issued a buy alert on META
With 3.5 billion daily users, Meta has an entrenched distribution network that is incredibly difficult to disrupt. Billionaire investors like Bill Ackman have recently taken massive stakes (approx. 10% of his portfolio) in Meta. He recognizes that the market’s fear of AI spending is masking a high-quality growth engine.
The Bottom Line for Dividend Investors
The current market dynamic is driven by narrative, not fundamentals. Investors are fleeing “knowledge stocks” because they are terrified of what AI might do in three years. They are ignoring the cash flow these companies are generating today.
History shows that when the market sells broadly and quickly, it often makes mistakes. It throws the baby out with the bathwater.
For dividend investors, this is a signal to look at the highest-quality names in the sell-off pile. Companies with proprietary data, deep moats, and strong cash flows are now trading at valuations that offer better starting yields and higher long-term upside than they have in years.
While the herd hides in Texas Roadhouse, the smart money is likely sifting through the wreckage of the software sector.
This does raise an interesting point: everyone is focused on betting on the companies developing AI.....but with Capex so large, and valuations already so stretched, the next wave of profits likely lie with the companies who best utilize and integrate AI as it become ubiquitous
Is it true that over longer time Horizons 95% of most wealth mangers do not achieve any alpha. Most you can do is be the market.