February 24, 2026
AI, Software Volatility, and the Case for Staying Diversified
If you've been watching the software space lately, you've probably noticed it's been choppier than usual. Notably, the volatility isn't coming from collapsing fundamentals. Many companies are still beating earnings, revenue growth is holding up, and margins are fantastic.
Indeed, the S&P 500 is on track for a 13.2% margin for the fourth quarter of 2025. The highest since FactSet started tracking it in 2009. Technology stocks are doing even better at 29% margins.
The Tension is About the Future
Software stocks are priced on tomorrow's expectations, not yesterday's results. And right now, the market is wrestling with a big question. If AI makes it cheaper and easier to build tools internally, do companies still need as many third-party software solutions? If generating code and customizing workflows becomes dramatically easier, does that pressure pricing power? Does it change the competitive landscape? That’s the fear.
We saw a version of this last year on the hardware side, when DeepSeek was announced. The initial reaction was that more efficient models would lead to fewer chips and lower demand.
Cheaper Tech, Rising Usage
Instead, something closer to Jevin's Paradox played out. When something becomes cheaper and more efficient, usage often expands. So, the more interesting question may be whether AI ultimately weakens software providers, or enables the strongest ones to become even more embedded, more customized, and more mission critical.
At the same time, we've seen capital rotate into non-tech sectors. Some of that reflects valuation. Software had a strong run. But some of it may reflect where the early benefits show up. If software becomes cheaper and better, the users could see margin expansion first.
That doesn't mean software loses; it simply means leadership broadens before it narrows again.
Why a Balanced Portfolio is Important
Periods like this are a reminder that narratives shift quickly. That's exactly why diversification matters. No single sector, no single theme gets to drive the entire outcome of a portfolio. Exposure across industries, across styles, and across asset classes helps absorb these rotations, rather than react to them.
Conclusion
Technology cycles tend to evolve over years, not quarters. Our job is to stay disciplined, avoid jumping to conclusions too early, and to make sure portfolios are positioned to participate without being overly dependent on any one outcome. If you have any questions about how these factors fit into your portfolio, please reach out to your advisor. We're always happy to help.
The information provided is educational and general in nature and is not intended to be, nor should it be construed as, specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice. This reflects the opinions of Focus Partners or its representatives, may contain forward-looking statements, and presents information that may change. Nothing contained in this communication may be relied upon as a guarantee, promise, assurance, or representation as to the future. Past performance does not guarantee future results. Market conditions can vary widely over time, and certain market and economic events having a positive impact on performance may not repeat themselves. Investing involves risk, including, but not limited to, loss of principal. Focus Partners' opinions may change over time due to market conditions and other factors. Numerous representatives of Focus Partners may provide investment philosophies, strategies, or market opinions that vary. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Services are offered through Focus Partners Wealth, LLC (“Focus Partners”), an SEC registered investment adviser with offices throughout the country. Registration with the SEC does not imply a certain level of skill or training and does not imply that the SEC has endorsed or approved the qualifications of Focus Partners or its representatives. Prior to January 2025, Focus Partners was named The Colony Group, LLC. Focus Partners has been part of the Focus Financial Partners partnership since 2011. RO-26-5226433
