Key Takeaways
- Software stocks lag significantly behind the S&P 500’s return to record territory
- The iShares Expanded Tech-Software Sector ETF (IGV) remains down 22% year-to-date despite rebounding strongly this week
- Oracle jumped 24% over the past week, while Microsoft and Palantir climbed 11%, though all stay negative for 2026
- Emerging AI players like OpenAI and Anthropic entering enterprise markets threaten established software providers’ business models
- Market technicians caution that the sector remains in a downtrend, warning against premature bottom-fishing
The software sector experienced a significant rebound this week, yet many market observers believe substantial recovery remains ahead before declaring the selloff over.
IGV, the iShares Expanded Tech-Software Sector ETF, has climbed more than 11% across the last three trading sessions—marking its strongest three-day performance since the pandemic-driven volatility of March 2020. Despite this impressive bounce, the fund continues to trade 22% below its 2026 starting point and recently touched levels not seen since November 2023.
Among individual movers, Oracle has led the charge with approximately 24% gains this week. Microsoft and Palantir have each posted gains near 11%. However, context matters: Oracle still carries a 12% year-to-date loss. Microsoft’s 15% decline makes it among the weakest performers in the Magnificent Seven cohort.
Meanwhile, the broader S&P 500 has climbed back to record peaks, advancing approximately 1.8% since late February. The software sector has clearly failed to match that momentum.
What’s Driving Software Stock Weakness
The fundamental challenge facing the sector is investor anxiety. Market participants are increasingly concerned that artificial intelligence platforms from companies like OpenAI and Anthropic will commoditize traditional software offerings and erode competitive moats. This concern has compressed valuations across the board.
The S&P North American Expanded Technology Software Index currently commands a forward price-to-earnings multiple of approximately 21. That represents a dramatic decline from nearly 40 times in July and sits well beneath the 10-year average of 34.
Certain companies have experienced particularly severe valuation compression. Salesforce now trades at just 13 times projected earnings, compared with its 10-year average of 45. Adobe has fallen below 10 times forward earnings, down from its historical average of 30. Adobe has also shed 30% of its value year-to-date.
Notably, investor Michael Burry revealed new stakes this week in multiple software companies, including Veeva Systems, Autodesk, and Adobe. Some market watchers interpret this as a bullish signal.
Meanwhile, Wall Street profit projections for the sector have shown modest improvement. Analysts now anticipate software and services earnings will expand 16.5% in 2027, up from the 15.7% growth rate forecast at February’s close.
Current Analyst Sentiment
Despite compelling valuations, not all professionals are turning bullish. Brad Conger from Hirtle Callaghan stated he has no interest in attempting to time the sector’s bottom, regardless of attractive pricing. Other analysts emphasize that even companies appearing secure today could face unforeseen AI-driven competition tomorrow.
Technical analysts remain similarly guarded. Adam Turnquist from LPL Financial observed that the sector continues trading in a confirmed downtrend with considerable “technical damage to repair.” He emphasized that establishing a 50-day moving average crossover and forming a pattern of higher lows would be necessary before confirming a sustainable bottom.
Paul Hickey and Justin Walters from Bespoke Investment Group characterized current buying attempts as equivalent to “catching a falling knife.”
From a technical perspective, the S&P North American Technology Software Index has established support around the 1,600 level. According to Turnquist, a rally above 1,908 would potentially indicate a double-bottom breakout formation.
Bloomberg Intelligence projects that software and services company earnings will grow 16.5% in 2027.
