Key Takeaways
- Software stocks have severely underperformed even as the S&P 500 reaches record highs
- Despite a robust weekly rally, the iShares Expanded Tech-Software Sector ETF (IGV) has declined 22% year-to-date in 2026
- Oracle jumped 24% during the week, while Microsoft and Palantir climbed 11% each, though all three remain significantly negative for the year
- Traditional software providers face mounting concerns about AI-native competitors like OpenAI and Anthropic disrupting their business models
- Market experts maintain the sector remains in a bearish trend and caution against premature entry
The software sector experienced a powerful rally this week, yet industry watchers suggest the recovery may be far from complete.
IGV, the iShares Expanded Tech-Software Sector ETF, has climbed more than 11% across three consecutive trading sessions—marking its strongest three-day performance since the pandemic-driven volatility of March 2020. Despite this impressive bounce, the fund remains mired in negative territory, down 22% year-to-date and trading at levels last witnessed in November 2023.
Among individual names, Oracle led the charge with a spectacular 24% surge throughout the week. Microsoft and Palantir each posted gains of approximately 11%. However, these rallies haven’t erased the year’s damage: Oracle still trades 12% below where it started 2026, while Microsoft has shed 15%, making it among the poorest performers within the elite Magnificent Seven group.
Meanwhile, the benchmark S&P 500 has reclaimed all-time peaks, advancing roughly 1.8% since late February—a stark contrast to software’s lagging performance.
The Fundamental Challenge Facing Software Companies
The primary culprit behind software’s underperformance is widespread investor anxiety. Market participants increasingly worry that artificial intelligence platforms developed by OpenAI and Anthropic could democratize software creation, making legacy products vulnerable to rapid commoditization. This existential threat has compressed valuations throughout the entire sector.
The S&P North American Expanded Technology Software Index currently commands a forward price-to-earnings multiple of approximately 21. This represents a dramatic decline from nearly 40 times in July and sits significantly below the historical 10-year average of 34.
Certain marquee names have experienced valuation contractions to unprecedented levels. Salesforce now carries a forward P/E of just 13 compared to its decade-long average of 45. Adobe has fallen below 10 times forward earnings, down from a typical multiple of 30. Adobe’s stock price has plummeted 30% in 2026 alone.
Notable investor Michael Burry revealed new stakes this week in multiple software companies, including Veeva Systems, Autodesk, and Adobe. Market observers interpret these disclosures as a potentially bullish signal for the battered sector.
Meanwhile, Wall Street’s profit projections for software companies have been gradually revised upward. Analysts now anticipate software and services earnings will expand 16.5% in 2027, an increase from the 15.7% growth rate forecasted at February’s end.
The Bear Case Remains Intact, Say Market Technicians
Despite attractive valuations, many strategists remain hesitant to declare a bottom. Brad Conger of Hirtle Callaghan explicitly stated he has no interest in attempting to time the sector’s nadir, regardless of how compelling valuations appear. Other commentators emphasize that today’s seemingly insulated software company could face unexpected AI-driven competition tomorrow.
Technical market analysts echo this caution. Adam Turnquist from LPL Financial observed that the sector continues to exhibit bearish characteristics and faces considerable “technical damage to repair.” He emphasized that establishing a sustainable 50-day moving average and forming a pattern of higher lows would be necessary prerequisites before confirming a genuine bottom.
Paul Hickey and Justin Walters of Bespoke Investment Group characterized current buying activity as equivalent to “catching a falling knife”—a precarious endeavor that often results in losses.
From a chart perspective, the S&P North American Technology Software Index has found temporary support around the 1,600 level. According to Turnquist’s analysis, a decisive move above 1,908 would potentially signal a double-bottom breakout pattern, suggesting a more durable reversal.
Looking ahead, Bloomberg Intelligence data projects profits at software and services firms will grow 16.5% in 2027.
