Software stocks +7%, Semiconductors -5%, the first watershed of the AI era

Let's look at a set of comparative numbers.

The iShares Software ETF$iShares Expanded Tech Software Sector ETF(IGV.US) rose from $86.63 at the close on 5/1 to $92.87 at the close on 5/18, a cumulative increase of +7.2% over 17 trading days, with four positive closes in the past five trading days, and on 5/18 it even rose +1.19% against the Nasdaq's decline (−0.51%).

During the same period, the semiconductor ETF SMH fell from a high of $576.31 on 5/11 to close at $546.16 on 5/18, a drop of −5.2% in five days; the −1.84% on 5/18 was the third negative close in the past week.

Software up 7, semiconductors down 5, two sectors in the same market moving in opposite directions—this kind of divergence hasn't really appeared in the past 18 months of the AI rally, where it was always 'computing power up, everything up; computing power down, everything down.' Is this the first signal of 'internal weight rotation within the AI track' in the AI rally?

I tend to think so. Here's a not-so-rigorous analogy for everyone—the logic of the AI rally over the past two years has been like building a house. For the first 18 months, everyone was scrambling to sell bricks, cement, and steel (NVDA / TSM / AVGO / various small-cap memory and optical communication stocks)—this was the 'foundation-laying' stage, where whoever could provide more and cheaper computing power got the meat. But you can't build a foundation forever; at a certain stage, someone has to start asking: after it's built and people move in, what furniture will they use, what appliances will they install, what wallpaper will they put up? This is the 'renovation' stage—the software application layer converting the hardware layer's computing power into concrete business value.

From the capital flows on 5/18, we can see the 'renovation crew' starting to enter. From an order flow perspective, the density of Sell Put income plays (institutions willing to take OTM Puts) received by the overall software sector has significantly increased, while the proportion of Buy Put hedging plays in the hardware chain continues to rise—this is institutions structurally 'reducing hardware, adding software.' Looking at more micro-level targets, the performance of several representative software stocks on 5/18 also shows clear divergence:

$Microsoft(MSFT.US) $423.54 +0.38% — The 'utilities' of the AI era. Copilot entering the enterprise SaaS penetration and harvesting phase, GitHub AI facing a pincer attack from OpenAI Codex and Anthropic Claude Code this week, but BofA's target price hike shows buyers still see MSFT as the 'large-cap stock with the highest certainty of AI revenue realization.'

$Adobe(ADBE.US) $255.64 +3.25% — The designer tool company, after being disrupted by AI for two years, has finally learned to 'counter-disruption.' AI-Powered Acrobat turns creative tools directly into productivity tools, upgrading from 'selling software subscriptions' to 'selling AI workflows,' and the market is re-rating it.

$Snowflake(SNOW.US) $164.24 +4.30% — Enterprise AI applications must be rooted in data, and SNOW is the foundation of the foundation. The new AI partner integrations + Dataiku Cobuild on 5/16 allow the data cloud to directly interface with AI model deployment, essentially combining the 'find data' and 'train model' steps into one.

$ServiceNow(NOW.US) $103.42 +8.78% — The biggest single-day gainer, BofA upgraded it from Hold to Buy with a target price of $130. AI agentic workflows are evolving enterprise SaaS from 'automation' to 'autonomy'—this is the first wave of realization for the agents thesis in the enterprise software track.

$AppLovin(APP.US) $492.38 −1.72% — Note that APP is not a classic IGV software member (IGV leans towards enterprise SaaS), but the AI ad algorithm monetization line in the mobile app layer hasn't failed. The high-level volatility after the strong Q1 earnings report is profit-taking after a big run-up, not a narrative collapse.

Looking at these five stocks together, MSFT / ADBE / SNOW / NOW are the core beneficiaries representing the IGV sector rotation, while APP is another sub-line in the application layer.

This software vs. semiconductor divergence isn't a one- or two-week market sentiment, but a structural rotation signal as the AI rally enters the 'application layer realization' phase. Semiconductors have gone crazy for a year and a half, so a valuation digestion period is reasonable; software companies have been neglected by the market for the past 18 months, and now the AI integration dividends are being realized fastest precisely by these established SaaS companies with existing customers and data foundations.

My view is not that 'semiconductors have peaked'—it's normal for an ETF of SMH's caliber to consolidate after a run-up, and it will continue to rise after the pullback is complete. My view is that 'over the next 1-2 quarters, the relative returns of capital will tilt towards software.'

Not investment advice. A sector ETF like IGV, with its relatively dispersed holdings, is suitable for dollar-cost averaging. For individual stock selection, MSFT has the highest certainty of AI dividend realization, NOW has the greatest elasticity for the AI agentic theme, SNOW has the purest data foundation, and ADBE has the clearest valuation repair potential. This is my own ranking based on my analysis, for reference only.