Software stocks rebound, was sell-off overblown?

Key Concepts

• AI Transition: The ongoing shift and investment in Artificial Intelligence technologies and their integration into existing industries.
• Capex: Capital Expenditure – funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• K-Shaped Economy: A socioeconomic pattern where different groups experience diverging economic fortunes; the wealthy continue to prosper while lower-income individuals fall further behind.
• Hyperscalers: Companies that provide cloud computing services and have massive data centers and infrastructure (e.g., Google, Amazon, Microsoft).
• Long-Dated Debt Instruments: Bonds or other debt with a maturity date far in the future (e.g., 100-year bonds).

Market Commentary & AI Investment – JP Morgan’s Jack Manley

Introduction & Market Overview

The discussion began with a note on the TSX reaching a record high, contrasted with mixed performance in US markets. Jack Manley, Global Market Strategist at JP Morgan Asset Management, was brought on to provide insights, particularly regarding diversification strategies for 2026 and the recent volatility in software stocks.

Software Stock Volatility & AI’s Realistic Timeline

Manley addressed the recent selloff in software stocks, characterizing it as “probably at least a little bit overdone.” He cautioned against prematurely anticipating a complete overhaul of the software landscape by AI, stating, “It feels like we’re putting the cart in front of the horse.” He emphasized the established nature of the enterprise software industry, with “deeply entrenched industry connections” and “decades of proven track records.” He pointed out the relatively short development timeframe (under two weeks) of the new AI-linked program, suggesting a measured approach to expectations. He clarified that AI is not currently capable of fully replacing existing software functionalities, stating, “Not right now. No.”

Google’s 100-Year Bond & Tech Debt

The conversation shifted to Google’s issuance of a 100-year bond to fund AI development. Manley described this as a “remarkable headline” reflecting the “pristine” balance sheets of tech giants. He noted that these companies can borrow at rates lower than the US government, making long-dated debt instruments viable. He framed the AI buildout as a “full-blown 21st century space race,” highlighting the significant capital expenditure (capex) involved. While acknowledging the potential risks associated with increased leverage in a potentially “frothy” market, he suggested that the high quality of the borrowing companies and low interest rates mitigate these concerns, stating it “might not be the canary in the coal mine that historically it had been.”

Investor Sentiment & Long-Term AI Potential

Manley acknowledged a recent shift in investor sentiment towards technology stocks, noting a decline from previous highs. He suggested that a “breath” and a broader perspective are needed, reiterating that AI “very much has the capability to fundamentally transform a lot of things in our lives.” He emphasized that despite the substantial investment, AI’s potential remains unrealized, but he expressed confidence in the long-term prospects, given the track record of innovation among leading tech companies. He advised long-term investors (over 12 months) to remain optimistic, stating, “If you are in this as a long-term investor…I think you’re going to be just fine.”

Global Market Strength & US Leadership

Regarding global markets, Manley predicted “slow but steady economic growth.” He identified the US as leading the pack, despite a “disappointing” first quarter in 2025, due to a strong rebound and momentum continuing into 2026. He pinpointed AI-related capex and broader technology spending as the “single most important driver” of this US economic strength.

Retail Numbers, Labor Market & the K-Shaped Economy

The discussion addressed flat retail numbers in the US and anticipated weakness in job numbers. Manley described the labor market as “tight” but not “strong,” characterizing it as a “low fire” market – difficult to enter if unemployed, but stable for those employed. He introduced the concept of the “K-shaped economy,” explaining that economic benefits are disproportionately concentrated among high-income individuals. He argued that this segment of the population, benefiting from tax changes, stock market gains, and home equity, drives the majority of consumer spending, offsetting weaknesses in the broader labor market and consumer base. He stated, “If you got money right now in the United States, you probably had never had more money than you do at the moment. If you don't have money right now, you're probably about as far behind as you've ever been in your lives.”

Conclusion

Jack Manley presented a cautiously optimistic outlook, emphasizing the long-term potential of AI while advocating for a realistic assessment of its current capabilities. He highlighted the strength of the US economy, driven by technology spending and the robust financial position of high-income consumers. His analysis underscored the importance of diversification and a long-term investment horizon in navigating the evolving market landscape. He stressed that while short-term volatility is expected, the underlying fundamentals support continued growth, particularly in the AI sector.