Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How AI Software Stocks Are Becoming the New Defensive Plays in June 2026
Transcript
- Lucas: So the S&P 500 closed at 7,354 today. The Nasdaq at 25,298. And here's the thing that's been nagging at me — in a bull market this durable, we usually see a clear rotation out of growth and into value, into cyclicals. But this time, some of the priciest software names are not only holding up, they're being treated like safety stocks. Luna: Wait — safety stocks? You mean like utilities and consumer staples? That kind of defensive? Lucas: Exactly. Take CrowdStrike — ticker c r w d — at 701 bucks. Its price to sales ratio is north of 18. Historically, that's a growth at any price multiple. But look at the reasoning: it's got 90 percent gross margins, subscription revenue that renews annually, and enterprises are locking in multi-year contracts because cyber threats aren't going away. So in a world where GDP growth is 2.1 percent and the Fed is at 3.63 percent, the market is saying: 'I'll pay up for that predictability.' Luna: Right, but isn't that just momentum dressed up as a thesis? I mean, CrowdStrike has been on a tear. Same with Datadog at 239, Cloudflare at 237 — these are not cheap stocks by any standard. Lucas: No argument there. But look at the bond market cues. The ten-year Treasury has been hovering around 4.1 percent. If the market truly believed a recession was coming, you'd see a steeper curve and a flight to Treasuries. Instead, we've got a flat curve and money flowing into these high-margin SaaS names as if they're quasi-bonds. It's a re-rating of the business model, not just momentum chasing. Luna: So what's the concrete case? Let's pick one. CrowdStrike. Lucas: CrowdStrike's revenue grew 33 percent year-over-year in its most recent quarter. Its net dollar retention rate is above 120 percent. That means existing customers are spending more. And it's generating free cash flow margins above 30 percent. So when the market looks at an uncertain macro — Minneapolis Fed President Kashkari saying he expects a rate hike this year — it says: 'I want businesses that don't need capital markets to survive.' CrowdStrike doesn't. It prints cash. Luna: But at 701, you're paying for that cash flow decades in advance. The P/E is over 80. How is that defensive? Lucas: That's the tension. Defensive in terms of revenue stability, not valuation safety. If rates go up, the present value of those distant earnings gets crushed. So there's real risk. But the market is betting that the Fed is near the end of its hiking cycle — the effective fed funds rate is 3.63, which is 25 basis points below where it was a year ago. So the duration risk on these stocks is actually shrinking. Luna: Hmm. So software as a defensive play only works if rates don't spike again. That's a bet on the Fed staying put. Lucas: Exactly. And the Fed's own dot plot suggests one more cut this year, but Kashkari's hawkish comment yesterday threw cold water on that. So the market is pricing in a narrow range. If the Fed holds steady, these stocks keep their premium. If they hike, get ready for a 20 percent drawdown. Luna: Let's talk about another angle: SpaceX being fast-tracked into the Nasdaq-100. That's going to drive massive ETF buying. I mean, any fund that tracks the Nasdaq-100 has to buy SpaceX shares. That's passive demand, not fundamental. Lucas: Huge point. SpaceX isn't even public yet — it's still private — but the announcement alone is reshaping flows. The Nasdaq-100 rebalance happens in July. ETFs tracking that index have over $300 billion in assets. So when SpaceX joins, those funds have to allocate. That's mechanical buying pressure. And it pulls attention back to the mega-cap tech names that dominate the index. Luna: So you've got AI software stocks acting defensive, SpaceX driving passive inflows, and the Fed in a holding pattern. What does that mean for the average investor? Lucas: It means the bull market is getting narrower, not broader. The Russell 2000, which tracks small caps, is up just 0.1 percent over the past five days. The S&P 500 is flat but near highs. So the leadership is concentrated in a handful of names with high margins and recurring revenue. If you're not in those names, you're not participating. Luna: That sounds like a recipe for a correction. Narrow markets are fragile. Lucas: They are. But narrow markets can persist for months. Remember 2023? The 'Magnificent Seven' carried the entire market. This feels similar, except the cast has shifted a bit — more cybersecurity, more software infrastructure, less consumer tech. The question is whether the breadth will widen or if we're heading for a concentration crash. Luna: Let's look at Datadog specifically. It's at 239. It's a monitoring platform for cloud applications. Its revenue growth is about 25 percent. Gross margins are 80 percent. But it's not profitable on a GAAP basis. Lucas: Right, but it generates positive free cash flow. That's the key distinction. In a bull market that's been running since October 2022, the market has rewarded free cash flow generation over reported earnings. Datadog's free cash flow margin was around 28 percent last quarter. That's higher than many traditional defensive stocks like Procter & Gamble. Luna: So the market is essentially treating free cash flow as a substitute for safety. Even if GAAP earnings are negative. Lucas: Yes. And that's a rational response to a low-growth, low-rate environment. But if the economy accelerates — say GDP growth surprises to the upside — then cyclicals would outperform, and these software names would lose their defensive premium. So it's a conditional thesis. Luna: Notably, the recent GDP print was 2.1 percent annualized. That's not boom territory, but it's solid. So the economy isn't screaming recession. Lucas: Exactly. That's why the market can afford to pay up for quality. Recession fears have faded. The Conference Board's leading indicators have stabilized. JOLTS data shows labor market still tight. So the macro backdrop supports the 'soft landing' narrative, which is perfect for these high-margin software names. Luna: Let me push back a little. If everyone is piling into the same trade — AI software as defense — doesn't that create its own risk? Crowding? Lucas: Absolutely. The crowding risk is real. If you look at the top holdings of the ARKK innovation ETF — which is up this year — many are these same names. And ARKK itself is at 78.13. That fund is highly volatile. A sudden shift in sentiment could trigger a stampede for the exits. Luna: So what would be the catalyst for that shift? A hotter CPI print? A hawkish Fed surprise? Lucas: Any of those. Or a geopolitical shock. Or a sudden earnings miss from a bellwether like CrowdStrike. The market is pricing in perfection. The moment reality disappoints, these stocks could correct 30 percent. That's the risk. Luna: But let's be fair — that's always the risk with high-multiple stocks. The question is whether the reward justifies it. And right now, the reward is that you're owning businesses with incredible unit economics in a world where growth is scarce. Lucas: That's the bull case in a nutshell. I'd add one more thing: the SpaceX fast-track into the Nasdaq-100 is a signal that the index is becoming more growth-oriented. That could pull more capital into the tech sector broadly, even if SpaceX itself isn't a software company. It's a sentiment boost. Luna: So if I'm an investor, how do I play this? Do I buy CrowdStrike at 701? Do I wait for a pullback? Lucas: I think the smarter play is to dollar-cost average. Don't try to time the entry. These stocks are volatile. But if you believe the thesis — that high-margin recurring revenue is the new defensive — then any 10 percent dip is a buying opportunity. Just be aware that you're buying a safety premium that could evaporate if the macro changes. Luna: And if you're not comfortable with that risk, you can always stick with traditional defensives. But they're not yielding much. Utilities are yielding around 3 percent. Consumer staples are growing 2 percent. The software names offer revenue growth of 20-plus percent. That's a big spread. Lucas: It is. And that spread is why the market is making this trade. Whether it's sustainable is the multi trillion dollar question. Luna: Speaking of value — if today's episode helped you think about that trade-off a little more clearly, that's kind of the point. These conversations take time to research and produce, and if it was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, no pressure at all. It's just a way to keep the show ad-free and focused on the numbers that matter. Seriously, even a five-dollar coffee helps. Luna: So back to that multi trillion dollar question — what's the one data point you're watching to see if this trade breaks? Lucas: For me, it's the relationship between the ten-year Treasury yield and the forward P/E of the software ETF, IGV. If the ten-year breaks above 4.5 percent, I think that's the signal that the defensive software trade is over. Because the discount rate would be high enough to justify selling those long-duration assets. Luna: And the ten-year is at 4.1 percent now. So there's about 40 basis points of cushion. Lucas: Correct. And given that the Fed is at 3.63 percent, a 4.5 percent ten-year would imply the market expects rates to stay higher for longer. That would be a regime change. Until then, the bull market in software defensives continues. Luna: Alright, let's leave it there. Thanks, Lucas. Lucas: Great conversation, Luna. See everyone next time.