- You can profit from the AI‑software paradox before the market catches up.
- HSBC sees AI as a value‑adding layer inside enterprise platforms, not a disruptor.
- The Nifty IT index’s 5% drop creates a valuation floor that could spark a multi‑year re‑rating.
- Software vendors, not AI‑only startups, are positioned to capture the next wave of AI‑driven revenue.
- Historical AI hype cycles suggest a 2026 inflection point for agentic AI adoption.
You thought AI would crush software stocks – you’re wrong.
HSBC's View on AI and Software
In a February 24 note, HSBC argued that artificial intelligence will not annihilate the software industry; instead, it will become the primary conduit for AI diffusion across the world’s biggest enterprises. The bank’s thesis is simple: enterprise software is the vehicle that lets large corporates harness AI in a controlled, repeatable way. AI generates intelligent data, but that data must be stored, validated, formatted, and acted upon by a deterministic software stack. In HSBC’s language, AI becomes a “subordinate agent” embedded inside existing platforms rather than a stand‑alone threat.
Why the Nifty IT Crash Is a Buying Opportunity
The Indian Nifty IT index slumped nearly 5% on February 24, pushing its month‑to‑date loss to 21%. The catalyst was the launch of Anthropic’s Claude Code, a tool that can modernise COBOL – a language that still underpins IBM’s legacy systems. While headlines framed the move as a tech‑sector death knell, HSBC sees the sell‑off as a classic over‑reaction. Software valuations are now near historic lows, offering a window to accumulate shares before a sector‑wide re‑rating driven by AI‑enhanced productivity gains.
Sector‑Wide Implications: From Hardware to Cloud
Hardware and semiconductor makers have already harvested AI‑related premiums, but the bulk of future value is shifting to software. Vendors with deep domain expertise, established sales channels, and massive code bases can embed AI agents more efficiently than pure‑play AI startups. This dynamic creates a competitive moat: incumbents can leverage AI to accelerate development cycles, improve code quality, and offer AI‑augmented SaaS solutions that are harder for newcomers to replicate.
Moreover, cloud providers will become the staging ground for these intelligent agents. As AI workloads move to the cloud, software platforms will integrate generative‑AI APIs, turning routine tasks—like ticket routing, demand forecasting, and compliance checks—into automated, high‑value processes.
Historical Parallel: AI Waves and Software Resilience
History repeats itself. In the late 1990s, the dot‑com boom promised to replace traditional software with web‑based services. When the bubble burst, legacy software firms that adapted survived and eventually dominated the cloud era. Similarly, the early 2010s saw a surge of “big data” hype; firms that embedded analytics into their core products emerged stronger. HSBC’s outlook mirrors these patterns: AI is another layer that, when fused with solid software foundations, fuels a new growth cycle rather than a terminal decline.
Technical Terms Demystified
- Large Language Model (LLM): A neural network trained on massive text corpora that can generate human‑like language. Anthropic’s Claude is an example.
- Agentic AI: Autonomous software components that can make decisions within a bounded domain, such as recommending code changes or triaging support tickets.
- Deterministic Processing: Computing that yields the same output for a given input, crucial for compliance‑heavy enterprise environments.
- Re‑rating: A market‑wide adjustment in valuation multiples when investors reassess growth expectations.
Investor Playbook: Bull and Bear Scenarios
Bull Case: AI becomes fully integrated into ERP, CRM, and industry‑specific suites by 2026. Software firms report double‑digit revenue lifts from AI‑driven upsells, pushing sector PE multiples back to 20‑25x. Early entrants—large Indian IT services firms and global SaaS leaders—outperform the broader market.
Bear Case: Regulatory pushback on AI data usage slows adoption, or a breakthrough AI startup bypasses incumbents with a truly disruptive platform. In this scenario, the sector could linger at depressed multiples, and only the most agile vendors survive.
Given the current valuation floor and HSBC’s confidence in a 2026 rollout of agentic AI, a balanced approach is to add exposure to diversified software stocks now, while keeping a modest hedge for regulatory or competitive surprises.