Few developments have had as big an effect on the stock market over the last four years as the advancements in artificial intelligence. The promise of productivity improvements from AI has driven significant spending on the technology, including new data centers and equipment to outfit them. However, the market has started to waver in recent weeks, amid fears that all that spending might not pay off in the long run.

Semiconductor stocks are technically in a bear market after falling more than 20% since late June. Hyperscalers are under increasing scrutiny as capital expenditures push free cash flow into negative territory. The results have some investors asking whether artificial intelligence is in a bubble.

If there is an AI bubble, it could lead to further pressure on semiconductor and hyperscaler stocks. One sector that could benefit currently looks extremely cheap, and it’s worth buying now regardless of whether there’s an AI bubble.

The stocks that could benefit from too much spending on AI

Earlier this year, software stocks tumbled as investors feared artificial intelligence services like Anthropic’s Claude Code could cut into their growth. Many analysts re-rated the value of current earnings because they felt future earnings growth wasn’t as predictable as it had been for many software-as-a-service (SaaS) companies.

The market indiscriminately sold off software stocks, with the iShares Expanded Tech-Software Sector ETF (IGV +1.36%) dropping nearly 30% from the start of the year through early April. While the sector has bounced back over the last few months, there are still plenty of values in software.

If there is an AI bubble, those companies hit hardest by the software sell-off earlier this year could be some of the biggest beneficiaries. First of all, it might suggest that AI isn’t as capable of fully replacing existing enterprise software solutions as feared. While many SaaS stocks have considerable moats that would protect their businesses against AI disruption, the fear of AI disruption has remained a significant overhang on stock prices.

iShares Trust – iShares Expanded Tech-Software Sector ETF

Today’s Change

(1.36%) $1.27

Current Price

$94.58

Key Data Points

AUM

$13B

Dividend Yield

0.02%

Expense Ratio

0.38%

Top Holdings

PANW

9.61%

MSFT

9.47%

PLTR

7.83%

Second, software companies integrating generative AI tools into their core offerings may be able to access the compute power needed to run those features at significantly lower cost. If hyperscalers overbuild and there’s not enough demand to meet the supply, they may be willing to sell access to their services at a lower price. That would transfer gross margin from hyperscalers to their customers, like software companies.

Not every software stock will be a winner. But large software companies with considerable free cash flow and low valuations could be well-positioned to benefit from capital market trends, potential operational flexibility, and financial wherewithal.

Some potential winners if investors move away from AI stocks

If investors move capital away from the biggest AI winners, like semiconductor stocks and hyperscalers, they may want to stay in the tech sector. As such, software stocks trading at attractive valuations could be natural landing spots for many.

Some of the most beaten-down stocks have already seen significant share price recoveries, including Adobe (ADBE +1.01%) and Salesforce (CRM +1.83%). Even after a recent increase in price, the two stocks trade for forward price-to-earnings (P/E) ratios of 10.3 and 13, respectively. Meanwhile, both are producing solid free cash flow: $10.3 billion for Adobe over the last 12 months, $14.7 billion for Salesforce.

Both stocks are down due to fears of slower growth. Analysts expect revenue growth of just 9% per year for both companies. Management continues to deliver growth above expectations, but investors remain worried about the future. Salesforce expects revenue to accelerate in the back half of the year after posting growth of 12% in the first quarter. Adobe grew revenue 13% last quarter while showing strong progress on its top-of-funnel freemium offering, which should support long-term revenue growth.

Today’s Change

(1.83%) $3.31

Current Price

$184.02

Key Data Points

Market Cap

$151BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$177.03 – $184.45

52wk Range

$146.32 – $269.11

Volume

9.7M

Avg Vol

14.9M

Gross Margin

75.12%

Dividend Yield

0.93%

Additionally, both are using AI to improve their products, increasing their utility and expanding their moats compared to smaller competitors. Adobe offers its own Firefly model, which is trained on its stock photos and videos. Salesforce introduced Agentforce, which uses its Data Cloud to automate some operations within its software.

These are just two examples of opportunities in the software sector. Investors could buy the whole lot with the iShares software sector ETF, but those who buy the highest-quality software stocks could do even better.

Entry-level corporate jobs are drying up, whether that’s due to AI or the prevalence of remote work, cutting off traditional avenues for launching careers. At the same time, demand for workers in skilled trades is booming amid the frenzy to build AI infrastructure.

Even more crosscurrents are at work. Baby boomers are retiring en masse, leaving positions to fill, and decades of declining birth rates have created a dearth of young workers.

Lightcast, a labor market data company, predicted in 2024 that U.S. employers will suffer “the largest labor shortage the country has ever seen” amid a demographic drought.

Georgetown University’s Center on Education and the Workforce estimated last year that the U.S. economy will need 5.25 million more workers with education and training beyond high school, warning that 171 occupations will face skills shortages through 2032 without massive increases in education.

Meanwhile, the proliferation of AI is making it easier to start a business with few workers—or even just one “solopreneur.”

So what’s a young Gen Zer to do?

Specialized talent

Economist and market veteran Ed Yardeni pointed to a recent surge in openings for professional and business services positions, saying they reflect the need for specialized talent required for AI adoption.

Companies with just one to nine employees saw the most openings, representing more business formation made possible by AI tools that lower the cost and complexity of entrepreneurship, he said in a note in June. But despite the surge in job openings, actual hiring was muted.

“That could be because the job openings AI creates are highly specialized, so talent is in short supply,” Yardeni explained, adding that it could also be the reason for higher long-term unemployment.

He noted the rise in tech job postings that require explicit AI fluency. In June, the share reached 75%, up from 67% in March and a 178% jump from a year ago.

Some of the fastest-growing skills are in areas like agentic AI, responsible AI and AI infrastructure, according to tech workplace platform Dice.

“AI is creating a structural skills mismatch as companies aggressively replace generalists with specialized talent,” Yardeni said. “We believe in the Jevons Paradox: As AI makes tasks more efficient, the falling cost of using that capability ultimately drives up total demand for it, making AI a net creator of jobs over time.”

‘General-purpose nerds’

Meanwhile, economist Simon Johnson, a Nobel laureate and MIT professor, has a different take. In an interview with the Financial Times in June, he used his daughters as examples of the two career paths young people face.

One daughter is interested in lab science, or the kind of high-value job that requires human judgement and is unlikely to be replaced by AI.

His other daughter is more of a generalist, Johnson said, adding that the advent of a new general-purpose technology, namely AI, requires “general-purpose nerds.”

“The general-purpose nerd is someone who can master the latest AI over the weekend. On Monday and Tuesday, they can interview real people face to face and learn things. On Wednesday, they can read a 50-year-old book that has not yet been digitised, make sense of it and figure out how you’re going to use it. On Thursday, they can run a podcast. On a Friday, they prepare a one-page memo for the minister,” he explained.

By contrast, a research assistant who simply looks up stock market data from Brazil, for example, could easily be replaced by AI.

But an assistant capable of integrating information, solving problems, and bringing solutions more quickly to leaders would be “quite appealing,” Johnson said.

For executives feeling overwhelmed by AI, he recommends they hire a general-purpose nerd, who is also a generalist outside of academics.

“I think young people getting life experiences, learning languages, traveling, understanding other people, being able to talk to people and listen face to face, and then combining these things, are going to be very valuable,” Johnson argued. “I think if you want to place your bets on something specialized, you need to think about where AI is going to come into that.”