Markets Brief: Top Semiconductor, Software Stock Picks with AI Back in Focus

With stocks hitting new highs and investors seemingly looking beyond the impact of the Iran war, the focus has turned back to the artificial intelligence boom. The latest in AI infrastructure growth was highlighted last week by blowout earnings from Taiwan Semiconductor Manufacturing TSM. The world’s largest chipmaker topped expectations for profits and revenues, and it even raised its expectations for future revenues.

Strategists at Citi Wealth wrote that they expect the market’s focus on AI to build further, with “AI back to being a big market driver in both directions.” But it may not be all good news, with attention on the two trends of “insatiable compute demand and software disruption concerns.”

Q1 Earnings Pick Up Steam This Week

Earnings will be the big focus this week across the market. Reports will include Tesla TSLA, UnitedHealth UNH, GE Aerospace GE, and AT&T T, along with United Airlines UAL and American Airlines AAL.

Whether and how oil prices impact company profits will be key, especially among airline stocks. “The #1 question I’ll be listening for is whether they saw any crimp in demand, like for summer or fall bookings after fuel and ticket prices went up,” says Nicolas Owens, who covers airline stocks for Morningstar. “Are people still hungry for travel—never mind the price—like in the last few years, or does affordability start to change behavior at these fuel levels?”

US airlines generally do not use financial hedging to protect against jumps in oil costs, as many European airlines do. They will instead simply raise ticket prices, Owens explains. However, Owens says that the speed with which the jump in fuel costs hit means it is unclear how much of that expense airlines were able to recoup. The Iran war produced a sudden, sharp rise in fuel costs, which “can meaningfully change airline profitability ... the closer to a flight’s departure date, the higher the portion of tickets that have already been sold at previously published prices,” he wrote in an airline overview earlier this month.

But the big attention-grabber will likely be Tesla, which reports after the closing bell on Wednesday. Analyst Seth Goldstein says he will be watching for updates on Robotaxi progress, the firm’s energy generation and storage business, and plans for the Terafab joint venture involving Intel INTC and SpaceX. While Goldstein does not expect a looming SpaceX IPO to be a big topic of discussion on Tesla’s earnings call, it could come up. “We will look for any details on the IPO, such as whether shares will be allocated for Tesla shareholders to purchase, or if Tesla CEO Elon Musk sees Tesla and SpaceX working more closely together in the future,” he says.

The Software Stock Rebound and Outlook, with Morningstar’s Top Picks

One of the biggest stories in the stock market over the last six months has been software stocks getting crushed amid growing concerns about the impact AI technologies will have across the industry. Even Microsoft MSFT saw its stock down 30% at the end of March from an all-time high last summer. But with the bounce in the overall stock market, software names have recovered some of that lost ground. Microsoft shares have rebounded by some 16% from their low point.

Still, software stocks are posting significant losses, and while there may be opportunities, Morningstar senior equity analyst Dan Romanoff sees AI as “both a threat and an opportunity.” Last week, he wrote: “Software firms are the most undervalued they have been in the last three years. Pressure on shares has driven valuation levels to skew attractive, but that comes with the price of very high uncertainty in the face of potential artificial intelligence impacts.”

Despite the significant uncertainty, Romanoff thinks the current fundamentals for software stocks look healthy, with cybersecurity- and public cloud-related firms showing the best growth. “We expect software to remain a strategic investment pond to fish in over the next several years,” he says.

Against this backdrop, here are Morningstar’s top software picks.

All AI-Systems Go for Semiconductor Stocks

While the outlook for many software stocks is highly uncertain, semiconductor companies remain in boom mode, thanks to the continued push to build more data centers.

“There’s no AI bubble on the horizon,” Morningstar senior equity analyst Brian Colello wrote in his latest quarterly semiconductor stock update. “AI chip demand should remain strong into 2027,” he says. “We now forecast that the AI buildout tailwinds will lift the entire chip industry to over $1.1 trillion of revenue in 2026. Nvidia is leading the way and should generate nearly $350 billion of revenue in calendar 2026 (fiscal 2027).”

Morningstar’s top picks among semiconductor stocks are Nvidia NVDA, Broadcom AVGO, NXP Semi NXPI, and Marvell MRVL.