AI boom splits software stocks: infrastructure and security soar while applications slump
The AI revolution is driving a stark divergence in software stocks, with infrastructure and security indices up 22% YTD, while vertical and application software indices are down 28% and 34% respectively, dragging the broad index to -13%.
Year-to-date performance in the US software sector reveals a sharp split driven by the AI boom:
- US Infrastructure Software Index: +22%
- US Security Software Index: +22%
- US Vertical Software Index: -28%
- US Application Software Index: -34%
As a result, the broad US Software Index is down 13% so far this year.
The divergence reflects surging demand for cloud infrastructure, data centers, and the cybersecurity tools needed to protect them — directly benefiting infrastructure and security firms. Meanwhile, application and vertical software companies face pressure as investors worry that AI will automate more tasks, erode traditional licensing models, and lower switching costs, making it easier for customers to change providers.
This fragmentation highlights an increasingly bifurcated AI software trade, where winners and losers are determined by exposure to the technology's infrastructure build-out versus its disruptive potential.
Source: The Kobeissi Letter