Wall Street Optimistic Software Selloff Has Bottomed Out
After months of intense selling pressure fueled by fears of artificial intelligence disruption, software stocks appear to have found their floor—at least for the time being. Market indicators suggest the worst of the sector's downturn may be over as investor sentiment shifts toward cautious optimism.
Significant Market Recovery Underway
The S&P 500 software index recently experienced its strongest performance since May, signaling a potential turning point for the beleaguered sector. The widely followed iShares Expanded Tech-Software Sector ETF, known by ticker IGV, posted its best week in eleven months and has surged fourteen percent since February 23rd. This recovery comes despite a market-rattling report from Citrini Research that painted a dystopian vision of AI's future impact on software companies.
Even with recent gains tempered by a slight dip this week, software stocks remain relatively inexpensive following the sustained selloff that began in the latter half of last year. A Goldman Sachs software basket currently trades at twenty-two times forward earnings, compared to twenty-one for the broader S&P 500 Index. Historically, this software basket has traded at an average multiple of fifty-two over the past decade, while the S&P 500's average stands at nineteen.
Valuation Disconnect Creates Opportunity
Individual companies demonstrate this valuation gap clearly. Cloud-based software provider Salesforce Inc. now trades at less than fifteen times earnings, significantly below its ten-year average of forty-six. Similarly, Microsoft Corporation trades at twenty-two times earnings, down from its ten-year average of twenty-seven.
"We see a big disconnect between valuations and high-quality fundamentals, where the risks seem exaggerated," observed Hua Cheng, portfolio manager at Mirova, which manages thirty-nine billion dollars in assets.
AI Fears Drove Historic Selloff
Risk has dominated conversations around software makers for months as investors worried about AI's potential to disrupt traditional business models. The underlying concern has been that if AI agents can code effectively, companies might build their own software solutions rather than purchasing from established providers.
With each new development from AI startups like Anthropic and OpenAI, stocks across multiple sectors—including finance, travel, and especially software—experienced selling pressure. The same day Citrini's research report emerged, International Business Machines Corporation shares suffered significant losses following Anthropic's release of a new tool that amplified those exact fears.
Throughout the downturn, numerous software bulls argued that concerns about profit and revenue growth prospects were exaggerated. Nevertheless, stocks continued declining, culminating in IGV's thirty-five percent drop from its September peak to its recent low on February 23rd.
Investor Sentiment Shifts Dramatically
Since that February low, software stocks have mounted a notable comeback. Hedge funds have reversed their positions on the sector after bearish bets reached seventeen-year highs at February's end, according to Deutsche Bank Securities data. A Goldman Sachs basket tracking software versus semiconductor companies has gained approximately nine percent this month as investors cover software short positions and unwind crowded chip positions.
Options trading reveals a parallel sentiment shift, with demand for software sector exposure surging as positioning moves from deeply oversold levels to active bullish re-engagement.
Multiple Factors Driving Recovery
Several developments have contributed to this rebound. An Anthropic event on February 24th proved particularly significant, as the company unveiled new tools developed in collaboration with several established companies that had been in traders' crosshairs.
Fundamentals have also played a crucial role. Even as software stocks sold off, profit estimates for 2026 continued rising. Software and services companies within the S&P 500 are projected to deliver twenty-one percent earnings growth this year, up from seventeen percent at the end of 2025, according to Bloomberg Intelligence data. Remarkably, ninety-three percent of software companies in the S&P 500 exceeded profit estimates during the fourth quarter, compared to seventy-four percent for the broader index.
Last week's trading activity further confirms this trend, with long-only investors purchasing twice as many software shares as they sold on average. This renewed appetite suggests growing confidence that software companies can adapt to and potentially benefit from AI advancements rather than being displaced by them.
