Philadelphia Semiconductor Index Falls Over 5% and SanDisk Drops Over 15% as Software Stocks Buck Trend After Morgan Stanley Says They Are Oversold

Tradingkey - On July 28 Eastern Time, the three major US stock indexes diverged. The sell-off in chip stocks continued to intensify, and AI hardware stocks extended their recent losses. The Dow Jones Index strengthened, while the Nasdaq 100 Index fell over 1% and the Philadelphia Semiconductor Index dropped over 5%.

At the sector level, memory and optical communication stocks led the declines; SanDisk ( SNDK) fell over 15%, dropping below the $1,100 mark; Micron ( MU) fell over 10%, falling below the $800 mark; AMD ( AMD) fell over 9%, Marvell Technology ( MRVL) fell over 7%, Intel ( INTC) fell over 6%.

Notably, amid the pullback in AI hardware stocks, apart from gains in defensive stocks like consumer and healthcare, capital also appeared to rotate into the software sector.

As of press time, SAP SE ( SAP) rose 6.28%, Salesforce ( CRM) rose 5.96%, Adobe ( ADBE) rose 5.95%, ServiceNow ( NOW) rose 5.60%.

Salesforce stock price chart, Source: TradingView

Reportedly, the software sector has underperformed the broader market for two consecutive years, and top Wall Street investment banks are now gradually turning bullish. Morgan Stanley stated that the market's pessimistic expectations for the software industry are overdone, and valuations have already priced in long-term concerns about industry maturation prematurely. The sector's actual opportunities are far higher than current pricing. The bank maintains an "Overweight" rating on the software sector and has launched a new stock-selection framework to target eight core AI beneficiaries.

Over the past two years, the S&P North American Technology Software Index has underperformed the Nasdaq 100 by a cumulative 40 percentage points. This underperformance is driven by investors' collective skepticism about the software business model: will AI dividends be monopolized by infrastructure vendors, can the traditional per-seat pricing model continue, will gross margins permanently shift downward, will architecture iterations disrupt the existing landscape, and will growth stall after token subsidies phase out?

Morgan Stanley summarized these debates into five core propositions. While it does not deny the broad trend of the industry entering maturity, it believes that the market has excessively discounted long-term worries into current valuations.

At the individual stock level, Morgan Stanley analyst Adam Wood proposed a two-tier evaluation framework of "Moat & Journey." The final eight highest-confidence Overweight picks are concentrated in areas such as cloud infrastructure, cybersecurity, and data services. The bank gave "Overweight" ratings to Microsoft, CrowdStrike, Cloudflare, Datadog, ServiceNow, Snowflake, and Shopify.

The underlying logic is the cyclical transmission pattern of AI implementation: the software industry generally follows a rhythm of "buy first, build later." Infrastructure and cybersecurity are the preliminary stages of AI computing power construction and have already entered the earnings realization phase, whereas the financial payoff for application software comes relatively later, representing late-cycle plays.