Palantir, Microsoft Slide as AI Rally Hurts Software Stocks

According to Barron's, a market phenomenon appears to be forming: when chip and networking equipment stocks rise, software stocks tend to fall. This dynamic played out again on Wednesday (12th), as the AI rally reignited, making Palantir (PLTR-US) and Microsoft (MSFT-US) among the worst performers in the S&P 500 index.

Palantir's stock dropped 2.2%, and Microsoft fell 2.3%. Other software stocks, including Salesforce (CRM-US), ServiceNow (NOW-US), and Workday (WDAY-US), also declined.

Meanwhile, shares of chipmakers and fiber-optic networking equipment providers rose. A series of strong corporate earnings reports indicated that AI demand remains robust, further boosting these sectors.

Software and chip stocks often move in opposite directions because investors view their roles in AI development differently.

Large language models (LLMs) require chips for computing power, and the large-scale expansion of data centers is driving demand for fiber-optic cables and other networking equipment.

At the same time, the market expects AI to significantly disrupt the software industry, as rapidly advancing 'vibe coding' tools could gradually render some existing software products obsolete.

However, this market trend is also two-way. Amid concerns over overvaluation in chip stocks, Palantir and Microsoft have surged 32% and 22%, respectively, over the past three months.