Why Software Valuations May Drop Despite Earnings Growth
BofA highlights that software stocks could see lower P/Es even with strong earnings. Market disruption is priced before profits, low-multiple tech tends to lag, and EPS growth can compress valuations when equity supply rises. Post-ChatGPT, IT Services lost their premium, reflecting repricing rather than sentiment. Rising asset intensity, weaker leverage, and private market issues add risk. Valuations fall not from failure but from resetting expectations, meaning even strong software companies aren’t immune. Source: BofA, Neil Sethi @neilksethi
UBS Warns of Cascading Defaults
UBS projects private credit defaults could surge to ~15%, driven by AI disruption in leveraged tech and services. High leverage, weak covenants, and concentrated exposure—especially in software—raise the risk of cascading defaults. Contagion could spread to public credit, widening spreads and threatening liquidity, while banks and insurers’ large exposure increases systemic risk. The private credit market isn’t in crisis yet, but all conditions for a severe credit cycle are present. Source: zerohedge
Credit crunch default rates ?
FT: “.. Holy moly. These are big global financial crisis-like — or at least dotcom-bust-like — numbers. While we haven’t spotted a time horizon for the forecast, we’ve whacked them onto this chart of historic default rates to give you a sense ..” Source: FT, Carl Quintanilla @carlquintanilla
JPMorgan's Bob Michele compared the move in CLO equity to ABX indices from 2005 through 2007.
Two decades ago, traders dismissed some of those ABX moves as noise. Some are doing the same today with this move in CLO equity. (1/2) Source: Lisa Abramowicz @lisaabramowicz1
This chart is fascinating, not only because of where the number stands today, but also how it has changed over time in these countries.
Which one stands out most? Source: Michel A.Arouet
Silver scores as the number 3 "bubble" according to BofA's Bubble Risk indicator (data per last week).
Source: BofA, TME
Software is deeply oversold (see below $IGV ETF) - Deutsche Bank seems to agree
1. DB argues Anthropic’s Enterprise Agents event reinforces that model providers are more likely to act as orchestration layers on top of incumbent software systems, not replace them, given the deep data, workflows, and metadata embedded in existing platforms (“Claude is only as useful as the data it connects to”). 2. This supports DB’s prior view that AI displacement risk to core software is over embedded in current multiples, making the event incrementally positive for the software sector. 3. Risks remain, including pressure on software development costs, potential changes to the interaction layer that could lower switching costs, and increased competition around the “control plane” for agentic AI, though DB continues to see this dynamic as supportive for infrastructure and compute demand.
P/E multiples tell the story
Software & Services used to rank as the 3rd most expensive industry group, it now sits 9th (and has fallen from 3rd to 13th in Europe). Multiples are down roughly 5.8x globally (around 5x in Europe), a re-rating unmatched by any other industry group. Source: DB, TME
