DB sees appeal in software even as short-unwind boost fades

European software stocks have rallied hard enough for Deutsche Bank to take profits on its overweight call, but the bank still sees the sector as an attractive portfolio hedge against semiconductor volatility.

Software has gained 13% in July, outperforming the STOXX 600's slight rise and easily beating semiconductor stocks, which have fallen 17%.

The move has prompted strategist Maximilian Uleer to close his directional overweight recommendation, arguing that short positioning has normalised since March peaks, meaning "the next leg up will need to come from long-only investors".

The bank remains cautious on sentiment as investors grapple with the implications of agentic AI for software companies' future growth prospects. However, Uleer argues current valuations still underestimate the sector's ability to adapt.

"We continue to like Software in a portfolio context".

Meanwhile on Monday, shares in SAP, Europe's biggest software maker, led the sector higher with a 5% surge after an 18% rise in July, its best month since 2015.

A further boost could come from hyperscalers if data-centre investment starts to slow.

Concerns are growing that large cloud companies could face increasing roadblocks to new projects, from supply bottlenecks to declining political support. But Deutsche Bank thinks the market will unlikely punish them for lower capex.

In that scenario, software companies could emerge as the clearest beneficiaries.

As Uleer puts it: "The more obvious winner would be Software."