Software equities, including shares of Figma Inc (NYSE: FIG), rallied on Tuesday, signaling potential relief following a period of decline attributed to concerns over rapid artificial intelligence (AI) developments. The uptick comes after JPMorgan strategists expressed optimism about the software sector's trajectory, suggesting that the recent downturn may have overextended the selloff influenced by fears of AI disrupting conventional software business models.
Leading this analytical perspective, JPMorgan's strategist Dubravko Lakos-Bujas emphasized that the pronounced descent in software stock valuations—primarily driven by apprehensions towards accelerated AI advancements—has likely overshot, thereby creating attractive investment prospects within select higher-quality software companies. This assessment stems from their belief that the market currently prices in worst-case AI disruption scenarios unlikely to manifest within the next three to six months.
According to this view, while the bearish sentiment surrounding software stocks has intensified, underlying solid company fundamentals suggest a more favorable risk-reward balance, potentially setting the stage for a sector rebound. This perspective contrasts with the perturbations experienced last week, which were heightened after AI developer Anthropic introduced new plugins for its Claude Cowork agent, reigniting worries that rapid AI innovation could infringe upon core software offerings.
Complementing JPMorgan's outlook, Morgan Stanley also articulated a positive stance on the software domain, rationalizing their outlook with forecasts of robust revenue streams, improved earnings revision trends, and macroeconomic factors such as a softer dollar that may advantage mega-cap tech firms. Their global research director, Katy Huberty, characterized the valuation dislocation observed in U.S. software stocks as primarily sentiment-driven rather than fundamentally justified, suggesting that investor perceptions rather than earnings metrics are chiefly influencing market valuations.
Additional impetus for the sector's positive momentum was provided by Datadog Inc (NASDAQ: DDOG), a cloud-based platform specializing in real-time system monitoring. Datadog reported fourth-quarter earnings of 59 cents per share, substantially surpassing analyst expectations of 39 cents. Furthermore, the company recorded a year-over-year revenue increase amounting to $215 million. The company’s forward-looking guidance projects fiscal 2026 earnings in the range of $2.08 to $2.16 per share, reflecting confidence in sustained financial growth.
In terms of price movements, Figma's shares experienced a 12.34% increase, trading at $24.86 as of Tuesday’s market close. Despite this ascent, the stock remains near its 52-week low of $18.41, underscoring the recent volatility the company has endured.
Within the broader thematic context, the AI industry is perceived to be transitioning from its initial phase—characterized by foundational advancements such as chip design, data center expansion, and infrastructure development—to a second wave where sectors like AI-driven drug discovery and autonomous cybersecurity are expected to create substantial value. Investors have already highlighted certain stocks at the forefront of this wave, with some experiencing rapid gains in price, signaling evolving opportunities in the AI landscape.
To summarize, the software sector's recent rebound, exemplified by Figma's stock performance, reflects a reassessment of AI’s immediate disruptive impact. Analysts suggest the current market environment, marked by apprehensive sentiment, might be overreacting to near-term AI risks, presenting investment openings in well-positioned software companies. Additionally, robust earnings results from peers like Datadog reinforce the sector's underlying strength, supporting optimism about future performance.