With chips facing setbacks, software is the next big bet in AI.

Last year, U.S. chip companies' stocks were the biggest beneficiaries of the artificial intelligence investment frenzy. However, this year, they have stumbled as investors shift their focus to software companies in search of the next best option in the AI market.

Volatility caused by tariff issues and a forecast of lower demand—following the emergence of cheaper AI models from China's DeepSeek—has diverted attention from semiconductor-related stocks.

Several analysts see the rise of software as a long-term evolution, as the spotlight moves from hardware components to AI infrastructure.

"There has been a very clear rotation, partly due to DeepSeek, the semiconductor sector’s above-average performance last year, and restrictions on U.S. chip exports to China," said David Russell, Global Head of Market Strategy at TradeStation.

"Investors are looking for the stories of the next three to five years… the companies that will benefit from what Nvidia has already accomplished."

Exchange-traded funds (ETFs) tracking software companies have also seen inflows.

The shift is a natural progression for AI investment, as the technology's use cases are primarily software-driven, said Adam Turnquist, Chief Technical Strategist at LPL Financial. LPL, an investment advisory firm, favors software over chips.

Source: CNN

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