Morgan Stanley is urging investors to buy the dip in software stocks as the AI trade cools off. The financial giant's analysts see high-quality companies with strong growth at attractive valuations as compelling opportunities, particularly as AI adoption continues to drive business performance despite recent market jitters.

Retail sentiment toward AI stocks has notably shifted, with Charles Schwab's Q1 2026 Trader Sentiment Survey showing bullishness dropping to 52% from 64% the previous quarter. This cooling enthusiasm has created buying opportunities in the software sector, where many stocks have given back recent gains. Microsoft, for instance, has erased its 12-month gains since Anthropic's Claude Opus 4.6 launch, though it still outperformed the broader iShares Expanded Tech-Software Sector ETF, which is down nearly 12% in the same period.

Microsoft's current valuation metrics make it particularly attractive, trading at a forward P/E of 23.49x—25% below its five-year average and just above the S&P 500's 21.92x multiple. The stock's dividend yield of 0.86% now exceeds its five-year average, offering income investors additional appeal. Morgan Stanley believes these software companies will adapt to potential disruptions from newer AI models, making the current selloff a strategic entry point for long-term investors.