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EUROPEAN SOFTWARE: WHEN FEAR CLOUDS FUNDAMENTALS

European software stocks have been under intense selling pressure since late last year, and the market reaction to SAP SAPG.DE earnings last week offered the latest example of how concerns over AI disruption are dominating the narrative.

UBS calculates that from last summer's peak, the sector has fallen about a third in dollar terms, echoing declines across U.S. names, with selling pressure intensifying in January.

The Swiss bank argues the move reflects fear rather than fundamentals, with many software firms continuing to post solid results and defining AI as an opportunity, not a threat.

"While there are certainly examples of AI-native market entrants succeeding at the expense of software incumbents, they have yet to land a real punch in terms of validating investor fears," UBS analyst Michael Briest writes.

The sector's forward PE ratio has fallen 31% since the peak to roughly 22 times, below its 10-year average of 34, with current prices implying materially slower long-term sales growth than analysts forecast for names such as SAP, Sage SGE.L, Dassault Systemes DAST.PA and Amadeus AMA.MC, UBS says.

To rebuild confidence, UBS expects companies to increase disclosure on AI traction. M&A could be another way to support sentiment, though the steep fall in valuations may complicate deal-making.

(Danilo Masoni)

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EARLIER ON LIVE MARKETS:

DEFENSIVES HELP STOXX LIMIT THE DAMAGE CLICK HERE

BEFORE THE BELL: FUTURES FALL AS METAL ROUT HITS MINERS CLICK HERE

METALS GET A LOT LESS PRECIOUS AS POSITIONS SQUEEZED CLICK HERE