Nuclear Armageddon for Software Stocks | WAYT?
Speakers
Josh Brown
— CEO, Ritholtz Wealth Management
Michael Batnick
— Managing Partner, Ritholtz Wealth Management
Summary
The episode discusses a sharp rotation out of mega-cap tech and software stocks as AI disruption fears intensify, with Josh and Michael debating whether the damage is a software-specific rerating or a broader market change. They highlight pockets of strength in equal-weight S&P, consumer staples, energy, materials, and specific energy and agriculture names, while warning against bottom-fishing broken software and value traps. Palantir's blowout earnings and Chipotle/PayPal weakness are also covered, plus a housing affordability update and a mystery chart.
- Mega-cap tech and software sold off while equal-weight market and non-tech sectors held up.
- AI disruption fears drove a violent software rerating, with guidance cuts and multiple compression.
- Josh and Michael debated selective quality exposure like Microsoft versus broken software names.
- Palantir reported another strong quarter but received a muted stock reaction.
- Energy, materials, and staples were highlighted as AI-resistant or AI-benefiting sectors.
- Specific energy and agriculture names were pitched, including Exxon, Chevron, Devon, Targa, Grainger, and Corteva.
- Chipotle, PayPal, Life360, and other falling knives were flagged as avoidable.
- Housing data showed a gradual shift toward buyers and softer rents.
Ideas
Market breadth broadening beyond mega-cap tech
Josh argues the market is broadening: the top 100 mega-caps drove 88% of returns from end-2024 to November 2025, but since November 3 only 24% of the return has come from the top 100 and 76% from the bottom 400. With RSP near an all-time high while the Mag 7 sell off, money leaving mega-cap tech is rotating into the other 65% of the market, and the AI capex boom is validated only if the benefits accrue to the S&P 493.
Staples can be AI margin beneficiaries
Josh argues staples can be AI beneficiaries because they are asset-heavy, low-margin businesses that can use an AI layer to improve margins and streamline delivery without needing more volume. He cites Pepsi up 5%, Coca-Cola's 22% total return, and Walmart joining the $1 trillion club, and says the defensive rotation may be misinterpreted just as the utilities rally was two years ago.
PE firms exposed to software
Josh argues private equity and alternative asset managers are under pressure because they bought or lent heavily to predictable SaaS/software businesses such as SmartSheet. Those software exposures are now being repriced, hitting the equities of alt managers like Blackstone, Blue Owl, Ares, TPG, and Apollo.
Netflix is AI-safe but wait
Josh is stalking Netflix after it hit fresh lows alongside Spotify. He says Netflix will not be disrupted by AI, but he has not bought yet and wants to see two consecutive green days before acting.
AMD double top, bad reaction
Josh notes AMD reported a double beat but the stock fell after hours and is down post-earnings, with a chart that looks like a double top. He reads the negative reaction to good news as a warning sign in a changing market.
AI is destroying software business models
Josh calls the software sell-off IGV nuclear armageddon: AI is disrupting software business models, companies are cutting guidance, and median software sales estimates are seeing the worst downward revisions since 2009. Customers can use AI and cloud models to replace point solutions and renegotiate licenses, eroding pricing power; IGV has roundtripped its post-Liberation Day recovery and may break lower as the market prices the worst case indiscriminately.
AI threatens Thomson Reuters' legal data
Josh says Anthropic's legal AI tool directly disrupts Thomson Reuters' legal and data business, which sells information and software to law firms, corporations, and research outfits. The stock was annihilated, is down more than 50% from its high, and he does not think liberation-day support will hold.
AI threatens FactSet and S&P Global
Josh questions how many tasks analysts used FactSet for that they can now do without it, saying AI can replace much of the data and analytics value. He groups S&P Global in the same disruption bucket; both fell sharply as investors reassessed the moat of financial data incumbents.
AI threatens Verisk's proprietary data
Josh says Verisk's proprietary insurance data and insights are vulnerable to AI delivering similar insights at a fraction of the price. The stock fell from around $330 to $193 with a puke candle, and the selling is coming from terrified holders.
Atlassian has no valuation floor
Josh says Atlassian had a $116 billion market cap in 2021 and $85 billion a year ago, and is now around $27 billion on its way to $10 billion. The stock went sideways at 11 times sales and peaked at 15-17 times sales; now at five times on its way to two, there is no floor if sales and earnings are not sustainable.
Prefer Microsoft over beaten-down software
Michael says the risk-management way to play the software nuclear armageddon is selection rather than timing, and he would rather buy Microsoft than a broken name like Atlassian. Microsoft may not give the biggest bounce, but it won't go to zero, so he can tolerate another 12% drawdown; buying Atlassian at 100 and seeing 80 would be painful.
Long-term CrowdStrike holder despite selloff
Josh says he is a long-term CrowdStrike shareholder and that the company crushed it, but the stock is down $150 from its high because cyber names were swept into the indiscriminate software selloff.
Palantir is a clear AI winner
Josh highlights Palantir's blowout quarter: earnings up 78%, revenue up 70%, commercial revenue up 137% to $507 million, government revenue up 66% to $570 million, balanced 50/50, 2026 guidance for 61% growth and 56% operating margins, and $7 billion of cash. He calls it a clear AI winner that must be on tech investors' sheets, though he notes the muted stock reaction and that foreign hesitancy to share data with a US-tied vendor could cap its size.
Avoid Chipotle falling knife
Josh walks through Chipotle's report: comps fell 2.5%, operating margin fell to 14.1% from 14.6%, restaurant-level margin fell to 23.4% from 24.8%, and revenue growth came only from new stores. He dislikes the new CEO's framing and says he is allergic to stocks like Chipotle, warning against catching falling knives.
PayPal is a value trap
Josh calls PayPal a classic value trap: it looked cheap at 9.5 times forward earnings before the print, but the turnaround under Alex Chriss lost credibility and he stepped down. He also warns that when Apple decides to compete through the device, it can destroy companies like PayPal, and he lists PayPal among the worst stocks he has ever met.
Apple can kill Life360
Josh uses Life360 as an example of platform risk: the family-tracking app is sticky, but if Apple builds family location into the iPhone, Life360 becomes redundant and nobody pays for it again. He warns against bottom-fishing businesses whose primary user entry is through Apple's device.
Energy leads and AI-proof
Josh says energy is the best S&P 500 sector year-to-date, up 11.9% and leading for three months, and that energy, materials, and staples cannot be replaced by AI. He sees money rotating into energy as investors sell software, with stocks breaking out, beating earnings, and raising guidance.
Materials are AI-resistant sector
Josh notes materials is the second-best S&P 500 sector year-to-date and groups it with energy and staples as sectors whose products cannot be replaced by AI. If you need industrial chemicals, typing into a computer does not help.
Oil equipment is AI-proof
Josh says oil and gas equipment is the best industry group month-to-date, up 20.74%, better than metals and mining. He distinguishes it from oil and gas services, emphasizing that it is physical equipment like pipes that AI cannot replace.
Exxon breakout after earnings
Josh says he pitched Exxon at about $118 and the stock is now around $144 and has gone vertical. It retested its 50-day, acted as a springboard, hit an all-time high in December, beat earnings, and raised guidance, with a 4% move today.
Chevron strong production and throughput
Josh says Chevron looks great, with its latest earnings showing the highest annual upstream production in over 40 years, record refinery throughput, and strong full-year earnings.
Devon cash return, cheap breakeven
Josh says he bought Devon Energy, a natural gas and exploration company with a 2.5% dividend yield, that returned $400 million to shareholders last quarter and retired $500 million of debt ahead of schedule while shrinking its share count 13% over five years. Its breakeven is $45 with WTI at $63, the downtrend since 2022 has stopped, and earnings are validating buyers; he is long with a stop loss, treating it as a trade, and will watch higher lows on down days.
Targa benefits from pipeline demand
Josh presents Targa Resources as a pipeline/transmission play driven more by demand than natural gas price, with tough winter weather supporting demand. It converted from an MLP to a C-corp so no K-1s, yields about 2%, and is expected to grow EBITDA 22%; the 50-day around 183 is the trailing stop.
Grainger tools not replaced by AI
Josh says W.W. Grainger sells tools and equipment and returned $1.5 billion to shareholders via dividends and buybacks last year. AI does not replace shovels or physical tools; the stock rallied 6% on its report and is slightly overbought short-term but is in favor this year.
Corteva agriculture growth, technical breakout
Josh says Corteva is an agriculture play, half pesticide and half seeds, that just raised guidance and talks about 6% growth for 2026. The chart took out its 200-day moving average around 68 and the next breakout is above 75 on good volume; it is on his best stocks list.
Up Next
This The Compound News video, published February 03, 2026, features Josh Brown, Michael Batnick discussing RSP, XLP, BX, OWL, ARES, TPG, APO, NFLX, AMD, IGV, TRI, FDS, SPGI, VRSK, TEAM, MSFT, CRWD, PLTR, CMG, PYPL, 360.AX, XLE, XLB, XES, XOM, CVX, DVN, TRGP, GWW, CTVA. 25 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Josh Brown, Michael Batnick · Tickers: RSP, XLP, BX, OWL, ARES, TPG, APO, NFLX, AMD, IGV, TRI, FDS, SPGI, VRSK, TEAM, MSFT, CRWD, PLTR, CMG, PYPL, 360.AX, XLE, XLB, XES, XOM, CVX, DVN, TRGP, GWW, CTVA