The recent market turmoil triggered by China's DeepSeek AI app, which initially caused a sharp sell-off in dominant tech stocks, may have unexpected positive implications for certain sectors, particularly software stocks.

DeepSeek's ability to provide AI capabilities at a significantly lower cost than US competitors has led analysts to predict potential benefits for software companies. Bank of America suggests that cheaper and improved AI models could accelerate AI adoption in the first half of 2025, potentially translating into meaningful revenue by 2026. Large-cap software companies like Salesforce, Adobe, ServiceNow, and Intuit are expected to be among the beneficiaries.

JPMorgan analysts agree, noting that AI investment momentum is shifting from hardware beneficiaries, such as chipmakers, toward an app-and-services phase. This pattern mirrors historical trends where software eventually eclipsed hardware in terms of growth and profit margins.

The iShares Expanded Tech-Software Sector ETF has already seen a 4% gain since the initial market reaction to DeepSeek. This surge indicates growing investor confidence in software stocks as potential winners in the evolving AI landscape.

Beyond software, some analysts see potential buying opportunities in non-AI IT hardware stocks that were caught in the DeepSeek sell-off, including names like Hewlett Packard, Western Digital, and Seagate Technology.

The market disruption may also be fueling a broader rotation out of tech stocks, potentially leading to a healthier, more diverse market. JPMorgan reported that while long-momentum equities suffered a significant decline, 70% of S&P 500 stocks actually gained during the session.

This shift could mark the beginning of a longer period of broadening gains, with value stocks potentially seeing increased interest. Macro conditions, including expectations of interest rate cuts and a strong economy, typically support such a broadening trend.

As the market adjusts to these new dynamics, investors and analysts will be closely watching how software companies capitalize on the potential for cheaper AI models and how this shift impacts the broader technology sector and market as a whole.