2026 Market Outlook: Investment Committee Discusses Stocks, AI, and Software Performance

Market Performance and Outlook

• 📌 The S&P 500 finished the year with a "whimper," despite expectations of a year-end rally, and is currently 85 points from 7,000.
• ⚠️ A note suggests the S&P needs to close above 6909.79 to avoid a negative Santa Claus rally, a scenario that has not occurred for three consecutive years.
• 🚀 There's a perceived pivot towards a broadening market narrative, benefiting the S&P equal weight index over the cap-weighted index.
• 💡 Capital is entering the market at the turn of the calendar, potentially from investors who sat out the latter half of Q4.

Technology Sector Divergence: Semis vs. Software

• ⚡ The NASDAQ is up significantly, largely driven by semiconductors (semis), not software.
• 📉 A strong narrative suggests AI is the death of software, leading to a dramatic underperformance of software stocks compared to semis in 2025.
• 📊 The IGV (iShares Software ETF) is up only 1.5% for 2025, while the SMH (Semiconductor ETF) is up 49%.

Challenges Facing Software and SaaS

• ⚠️ Software stocks continue to decline, with a prevailing narrative that AI is negatively impacting the sector.
• 🎯 Even favored software names like Microsoft have shown dead money performance since July, despite cloud growth.
• 📉 Companies like Adobe have faced downgrades due to a lack of catalysts, and the market is questioning the future of SaaS models with the rise of AI.
• 🛠️ Call center companies like TTEC serve as an example of how AI can disrupt traditional software-reliant businesses, leading to significant stock depreciation.

Navigating the AI Disruption

• 🧩 Investors are advised to be more selective in AI investments, as not all AI plays will be successful.
• 🔍 The market is grappling with the idea of AI displacing software, and finality to this argument is not in sight.
• 📈 While some software names show slight outperformance on a relative basis (e.g., Salesforce on a 30-day basis), the overall momentum for the sector looks challenging.
• 💡 The landscape is difficult to navigate, with the market potentially waiting on the sidelines for a clearer direction in software and AI-impacted sectors.