By Joe Stonor

Software stocks are poised to outperform as the Middle East conflict is likely to hit other sectors harder, according to State Street's Head of Equity Research Marija Veitmane.

Higher energy costs and dimming consumer confidence from the war will weigh on earnings across all sectors. But software's historically high margins, and the resilience of the artificial-intelligence investment cycle, mean the sector is better insulated from external shocks than others, Veitmane said.

"Technology companies are less affected than your typical cyclicals with lower margins," the strategist said.

As a result, European equity indexes--with their tilt to energy-hungry industrials and consumer-sensitive stocks--stand to lose. A further weakening of the dollar, and the prospect of the European Central Bank raising its policy rate, further cloud the outlook for the continent's stocks, Veitmane added.

Software stocks fell sharply across the globe in February as investors worried that companies would be able to use increasingly powerful AI agents to build their own software, eating into incumbents' market share.

However, "the market was too apocalyptic about its outlook," Veitmane said.

While valuations stabilized in March, a basket of European software stocks remains down around 23% so far this year. The sector rallied Wednesday even as the broader market fell, with a European software gauge climbing 1.7%. At the same time, the all-sector Stoxx 600 index was down 0.4%.

A key advantage for the sector is the "big hooks" that software companies have binding them to their clients. The time and cost of embedding software in a company's operations, as well as trust over data privacy and security, tie corporates to their software providers, Veitmane said.

Though AI will have a downside impact on software companies' margins, earnings won't fall as far as current valuations suggest, the strategist added.

Write to Joe Stonor at josephmichael.stonor@wsj.com

(END) Dow Jones Newswires

April 15, 2026 11:41 ET (15:41 GMT)

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