Wall Street has gotten repeatedly burned calling a bottom in software stocks, which have been hit hard by fears that artificial intelligence will make the companies obsolete. But this week’s bounce is bringing some bottom-fishing investors back to the group on hopes that the worst may finally be over.
In just the past two sessions, a popular exchange-traded fund that tracks the software industry is up 6.4%, Oracle Corp. has soared 18%, and Microsoft Corp. and Palantir Technologies Inc. have gained 6%.
“This idea that AI is going to destroy every software company is I think a little bit hard to get on board with, or at least premature,” said Emily Roland, co-chief investment strategist at Manulife John Hancock Investments.
The rally is following an extended period of weakness. The iShares Expanded Tech-Software Sector ETF, better known by its ticker IGV, closed Friday at its lowest since November 2023 and remains down 24% this year. Even with the two-day surge, Oracle has lost 14% in 2026. And Microsoft’s 18% decline puts it neck-and-neck with Tesla Inc. for worst performer among the Magnificent Seven technology giants.
The slump reflects ongoing fears that long-term demand for software will be permanently weakened by offerings from AI companies like Anthropic and OpenAI, weighing on pricing power, revenue growth and margins, all of which will erode the sector’s historically lofty multiples. However, that disruption risk is far more apparent in sentiment than in the companies’ financials. And valuations are now so washed out from the selloff that some investors see an opportunity to buy back in.
“The fear has gotten ahead of the fundamentals in a lot of ways,” said Roland, who sees the selloff as overdone. IGV was up 2.5% in early trading Wednesday.
In a sign of how jittery investors are, software stocks pared gains on Tuesday afternoon following a report from the Information that Anthropic is preparing to release a new AI-powered tool for designing websites and presentations.
Market technicals also support the case for a software rebound, according to Adam Turnquist, chief technical strategist for LPL Financial. The S&P North American Technology Software Index found support near the 1,600 level, and a rally above 1,908 would raise the possibility of a double-bottom breakout, he said.
“The software sector remains in a downtrend and still has technical damage to repair before evidence aligns for a bottom,” Turnquist said. “But improving momentum and volume trends suggest selling pressure may be losing some steam.”
In a vote of confidence for the group, famed investor Michael Burry on Monday touted his positions in a few software companies, including Veeva Systems Inc., Autodesk Inc. and Adobe Inc., the maker of Photoshop, which has become the poster child for AI disruption fears while plunging more than 30% this year.
Rising Expectations
Wall Street analysts have also been been raising their earnings estimates for the sector. Profits at software and services companies are expected to increase 16.5% in 2027, according to Bloomberg Intelligence data. At the end of February the figure was 15.7%. And there’s a similarly improving trend in 2027 revenue expectations.
The combination of rising projections and falling prices has helped the group’s valuation. The S&P North American Expanded Technology Software Index, which IGV tracks, is trading at about 21 times forward earnings, down from almost 40 in July and well below its 10-year average for 34.
Some big software stocks are at multiples that would’ve been unthinkable just a few years ago. Salesforce Inc., for example, trades for less than 13 times estimated earnings, a fraction of its 10-year average of 45. Adobe is below 10 times, down from its 10-year average of 30. Both multiples are near record lows.
“Fundamentals aren’t all bad within software,” said Jonathan Dane, chief investment officer at Defiant Capital Group, which manages over $1 billion in family wealth. But all of the stocks “are being lumped into the same disruption narrative.”
While he expects more volatility in the sector, “Microsoft and Oracle are standing out as starting to get really attractive,” he added.
To be sure, there are plenty of investors who are wary of buying the software dip given the challenges facing the industry, such as declining revenue growth and the rapid progression of AI in which each update seems to herald a new leap in capability. In other words, a company that looks safe or cheap today could turn into a problem tomorrow.
“We have a valuation bias, so we like things that are cheap and normally software would sort of get our interest. But the more time we spend on it, the more uncertain it is,” said Brad Conger, chief investment officer at Hirtle Callaghan & Co. “I’m not interested in finding a bottom.”
To Wall Street pros, it all comes down to time. As the AI bull cycle runs on, the winners and losers will reveal themselves.
“Everyone will have to go through some pain to get to the other side. There are probably some zombie software companies out there now,” said Brian Kersmanc, portfolio manager at GQG Partners, which has about $162.5 billion in assets. “This is a forest fire that will clear out the underbrush. Eventually we will be able to see which trees are the strongest.”
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