Bob Homan: Softwaremageddon? Why panic is premature
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
The technology sector started the year with some slight turbulence. Globally, tech is down this year, while the broader market is up. Given that technology now accounts for almost a quarter of global market capitalisation, it is understandable that any shock in this sector is immediately felt in the broader market.
The shock is particularly visible in the US, where tech accounts for more than 40% of the S&P 500, meaning that a decline drags down the entire index. In Europe, on the other hand, we are seeing green figures for the sector, although this is largely due to one heavyweight: ASML, which accounts for almost half of the European tech index. It is as if one striker determines the outcome of the entire competition.
Nevertheless, the recent weakness is not a sign that the fundamentals are crumbling. Operating results remain solid, often even stronger than those of the broader market. Valuations, which were labelled “expensive” last year, have returned to their historical averages. And the outlook remains impressive: analysts are forecasting profit growth of more than 35% for the sector this year. If there is a bubble, it is behaving remarkably rationally.
Investor unrest comes mainly from one corner: software. This industry is down nearly 15% this year. This segment accounts for a quarter of the technology sector worldwide and as much as a third in the US. The question on everyone's lips is whether AI agents could render traditional software obsolete. It sounds like a threatening scenario, but recent history shows that predictions about “the demise of X due to technology Y” rarely come true. When ChatGPT was launched, it seemed as if the classic search engine was on its last legs. Meanwhile, Google has integrated Gemini into its products and thus retains its dominant position. The story that DeepSeek would break NVIDIA's power also turned out to be mostly speculation.
Large tech companies have deep pockets, huge development teams and a strong incentive to quickly absorb or neutralise any threat. Not everyone will win the race, but the sector as a whole has an exceptional ability to adapt. It is precisely this ability that has made it great.
Physical limitations are currently playing a much more concrete role. Demand for computing power is exploding, and RAM memory production can barely keep up, resulting in a fivefold increase in prices in six months. Data centres are reaching their maximum capacity, while electricity grids are struggling to cope with the rapid increase in demand. In the US, data centres now consume as much electricity as the whole of Thailand. These are not sentiments, they are physics.
For investors, this does not mean fleeing from tech, but rather an invitation to take a broader view of the playing field. Technology remains an essential pillar in any portfolio, if only because of its weight in the indices and its superior profit growth. However, the AI revolution extends beyond software and semiconductors. Pharma, energy companies and infrastructure players are also benefiting from digital growth.
The conclusion is simple: this is not software Armageddon. It is a sector that is growing, grinding, squeaking and creaking, as it always has done. That squeaking and creaking can sometimes make it difficult to remain invested, but that remains the adage here too.
