Podcast Summary: “Software Stocks Melt Down, Palantir Beats, Energy up 12%”

Podcast: The Compound and Friends
Hosts: Downtown Josh Brown & Michael Batnick
Date: February 3, 2026

Episode Overview

This episode dives into the dramatic shift taking place in equity markets as software stocks experience a sweeping sell-off, energy and other non-tech stocks surge, and Palantir posts striking earnings. The hosts analyze what’s driving the rotation out of the Mag 7 and broader tech, the real-time consequences for SaaS and software companies, and what it means for investors. They also break down sector leadership, portfolio pitfalls, AI’s winners and losers, and where defensive investing comes into play. The tone is brisk, honest, and at times humorous, with a focus on actionable insights.

Key Discussion Points & Insights

1. Market Rotation: Tech Selloff & New Leadership

• Market Breadth Widening:
  • S&P market returns over the past year flipped from being almost entirely driven by the top 100 mega-cap names (Mag 7) to now seeing most returns from the “other 65%” (04:00–05:30).
  • “We spent so much time wondering, worrying about the 35% of the Mag 7, what would happen to the index when they fell? Well guess what? 65 is bigger than 35… And literally the opposite is happening.” – Josh (04:20)
• Tech Rout:
  • Former market darlings—Nvidia, Microsoft, Oracle—took heavy hits.
  • Software SaaS stocks, in particular, are undergoing a “violent re-rating” with sharp drawdowns unlike anything seen at this scale before (18:53–19:59).
• Defensive Sector Surge:
  • Energy, materials, staples showing notable strength. Not just “boring stocks,” but megacaps like JP Morgan, Berkshire Hathaway, Walmart, ExxonMobil, Chevron leading the rally (05:00–06:00).
• Chart Notes:
  • Spread of S&P outperformance among more constituents at levels not seen since the post-dot-com period, indicating a broadening bull market outside big tech (06:10–06:45).

2. AI’s Double-Edged Sword: Creative Destruction in Software

• CapEx Bubble or Real Gains?
  • The bull case on AI no longer supports just mega-cap tech; now, the benefits (like automation and efficiency) accrue to customers, possibly at the direct expense of traditional SaaS business models (06:45–08:13).
  • “The only way the AI capex boom wasn’t a bubble is if the benefits accrue to the S&P 493. ... Now the AI impact on the market is sort of turning into a new story nobody wants.” – Josh (06:45)
• Rapid Disruption Fears:
  • Guest clip from John Gray (Blackstone): The real risk is not bubbles, but “disruption risk”. Rules-based, intermediary businesses—accounting, legal, mid-market SaaS—face sudden AI-derived threats. (11:28–13:18)
  • “What happens when industries change overnight?... We’re spending tons of time thinking about rules-based businesses. ... Some businesses that are intermediaries where you may have these agentic agents, these agentic commerce happening, which could change the way we do things.” – John Gray (11:29)
• Consequences for Valuations & Private Equity:
  • SaaS multiples collapsing. PE firms holding billions in such companies face a valuation reckoning.
  • “One of the most violent re-ratings for any sector I have ever seen.” – Josh (18:53)
  • “A financial crisis for software companies.” – Josh (23:42)

3. AI as a Lifeline for Traditional Sectors

• Consumer Staples as AI Beneficiaries:
  • Debate on whether boring industries like Pepsi, Coca-Cola, and even Walmart (now $1T valuation) will see AI-driven margin boosts as they streamline heavy asset operations. (09:00–10:58)
  • “Discretionary versus Staples as a signal...Sometimes what buyers and sellers are doing in these industry groups...is not what you think. ... We start thinking of them as AI beneficiaries. And look no further than Walmart which joined the $1 trillion club today. ...” – Josh (09:03–10:58)
• Defensive Outperformance Isn’t Always Bad News:
  • The rise of consumer staples or utilities does not always imply economic doom. Sometimes it just reflects new efficiencies or investor preference shifts (09:03–10:58).

4. Software Rout: Specifics, Implications, and Investor Psychology

• Radical Valuation Adjustments:
  • SaaS and vertical/horizontal software companies (Adobe, Atlassian, ServiceNow, Workday, Salesforce) are all at fresh 52-week lows, with many dropping over 40%+ from highs. (18:22–19:59)
  • Market is “aggressively lowering guidance”; median sales estimate cuts rival 2009 financial crisis levels (21:32–22:13)
• Impossible to Escape Selloff:
  • “I couldn’t find a software company that was able to escape this. Even the cyber names, they came for the cyber names today. ... CrowdStrike, they crushed it. The stock's down $150 from its high.” – Josh (33:49)
• Investor Behavioral Insights:
  • “If you have the kind of personality where you’re like, no, I’m taking the Patriots, I’ll take the points… then it makes sense if you’re bottom fishing...I’m just much more likely to look at whatever’s doing great right now and assume it’ll continue.” – Josh on why not to bottom fish fallen names (44:51–45:98)

5. Palantir: An Outlier Winner

• Palantir’s Outperformance:
  • Massive beats: Commercial revenue up 137% YoY, government up 66%, operating margins also expanding (35:51–37:41).
  • “Palantir is on course to reach $10 billion in revenue at the fastest growth rate and highest margins, perhaps in software history.” – Morgan Stanley analyst (37:29)
• Market Skeptic Despite Results:
  • Even with standout numbers, market’s reaction is muted due to broader bearish sentiment on tech (37:41–37:55).

6. Sector Rotation: Energy, Materials, and Defensive Stocks in Favor

• Energy & Materials Leading:
  • Energy: +11.9% YTD, materials, and staples also strong. Three top-performing sectors now have little direct AI risk or substitution (56:00–57:18).
  • “If you need industrial chemicals, typing something into a computer is not going to help you. ... If you need a Hershey bar, there’s no answer coming from Perplexity. ... If you need a barrel of oil ... you ain’t getting anything from OpenAI.” – Josh (56:00–57:18)
• Stock Highlights:
  • Exxon, Chevron, Devon Energy, Targa Resources, Granger, Corteva cited as stocks working now (58:00–64:00).
  • Technical analysis validates the trend: “Retest of the 50 [DMA], acted as a springboard, never looked back...beat earnings, raise guidance, it’s just off to the races.” – Josh on Exxon (58:42)
  • Caution not to “flip the whole book into energy” but notable the contrast to bombed-out SaaS.

7. Investing Lessons: Avoiding Value Traps & Recognizing Changing Market Conditions

• Value Trap Warnings:
  • The importance of not confusing low P/Es with value. “I don’t need an analyst to tell me when a 10 PE stock is cheap. I need an analyst to tell me when a 40 PE stock is cheap.” – Steve Mandel (38:58–39:20)
  • Examples: PayPal and Chipotle discussed as tempting traps with ongoing issues (43:38–48:06).
• Knowing When to Sell:
  • “If I’m wrong, I’m out. ... I’m not getting married to these names in downtrends.” – Josh (48:08)
• Big Tech’s Moat:
  • “If your business's primary entree for the user is an Apple device ... If Apple decides they're getting into your business, nothing will save you.” – Josh on Life360 and platform risk (49:56–51:43)

8. Bright Spots: Housing & Rental Market Relief

• Housing Market Turning:
  • 62% of buyers in past year purchased below the original asking price—the highest rate since 2019 (52:01–53:29). Rent and home price growth is slowing or starting to reverse, a rare piece of “good news.”
  • “It's not a miracle drop for the housing affordability situation, but it is improving.” – Josh (55:22–55:30)

Notable Quotes & Memorable Moments

• On Market Rotation:
  • “We all just took for granted that when the 35% fell, the 65% would fall harder. And literally the opposite is happening. And I find it fascinating.” – Josh (04:20)
• On Software Carnage:
  • “This is one of the most violent re-ratings for any sector I have ever seen.” – Josh (18:53)
  • “It's a financial crisis for software companies.” – Josh (23:42)
• On AI Disruption:
  • “I think the biggest risk is actually the disruption risk. What happens when industries change overnight?” – John Gray, Blackstone (11:29)
• On Defensive Sectors:
  • “We start thinking of [staples] as AI beneficiaries. And look no further than Walmart which joined the $1 trillion club today. ... Even stories that we've told ourselves for 100 years ... everything needs to be rethought in the age of agentic AI.” – Josh (09:03–11:15)
• On Picking Winners:
  • “If I'm going to lose money, I want to lose money in toast.” – Josh (47:45)
• On Energy’s Resurgence:
  • “If you need a barrel of oil...you ain’t getting anything from OpenAI. ... Pay attention when the market’s speaking.” – Josh (56:00–57:18)
• On Value Traps:
  • “PayPal, on the surface, looked cheap. Turned out it was expensive.” – Michael (39:24–39:30)
• On Apple Threat:
  • “If Apple decides they're getting into your business, nothing will save you.” – Josh (51:11)

Key Timestamps

| Segment | Timestamp | |-------------------------------------|--------------| | Market rotation, breadth | 02:30–06:45 | | AI as disruption, not just a bubble | 06:45–08:13 | | Defensive sector rally | 09:00–11:15 | | John Gray clip (disruption risk) | 11:28–13:18 | | Software selloff details | 18:53–22:13 | | Software “financial crisis" | 23:42 | | Palantir earnings | 35:51–38:47 | | Value trap discussion | 38:58–39:30 | | Investor psychology, bottom-fishing | 44:51–46:01 | | Energy/materials resurgence | 56:00–64:00 | | Housing/rental market relief | 52:01–55:30 |

Conclusion

This episode delivers a jam-packed market post-mortem of a major sector shift—from software/tech dominance to a rally in defensive and cyclical leadership. Josh and Michael stress the importance of recognizing real disruption risk from AI, the dangers of value traps in both tech and consumer names, and the virtue of being open to sectors where real (not speculative) earnings power is growing. As always, they encourage independent thinking, careful risk management, and listening to what the market (not narratives) is telling you—especially when everyone else is looking the other way.