The US software sector is experiencing its most powerful rally in a quarter-century, with a dramatic rotation from being deeply out of favor to intensely sought-after, catching the market off guard with its speed and intensity.
The iShares Expanded Tech-Software ETF (IGV) has soared approximately 44% from its April lows and recently posted its largest two-day outperformance relative to the S&P 500 since 2001.
In the options market, daily volume for IGV call options briefly exceeded 280,000 contracts, setting a record, as retail capital flooded in at unprecedented levels. JPMorgan positioning data indicates long positioning in the software sector remains at the 1st percentile historically—suggesting the short squeeze is far from over.
Simultaneously, China's internet sector surged 5% in a single session, prompting investors to ask if it could follow the same "catch-up" logic. JPMorgan APAC strategist Matthew See notes that while the narratives are similar, fundamental differences in profit trends and business models between the sectors make a direct comparison risky.
The Historic IGV Rally: From Neglect to Frenzied Buying
For most of the AI investment boom, semiconductors dominated the spotlight, while software was largely ignored. This dynamic has been completely overturned in recent weeks.
According to market tracking, IGV has rebounded roughly 43% to 45% from its April low, a gain nearly equivalent to that of the Philadelphia Semiconductor Index (SOX) over the same period—a result that has surprised many investors who bet on "chips over software." In recent sessions, software's outperformance relative to semiconductors has reached its highest level in over 25 years.
The options market reaction has been particularly extreme. Goldman Sachs data shows that daily volume for IGV call options surpassed 280,000 contracts last Friday, the highest single-day volume on record, followed by 225,000 contracts on Monday. Concurrently, Vanda Research reports that retail investors purchased a record $46 million worth of IGV in a single day, approximately 40% above the previous record set in February.
Three Key Catalysts: Earnings, Narrative, and Short Squeeze Converge
In early 2026, the "SaaSpocalypse" panic sweeping the software sector was the dominant market theme. Every blog post from Anthropic or OpenAI about AI-driven productivity gains would erase tens of billions in market value from related software stocks, with sectors like legal software also impacted, followed by a flood of bearish research. That era is now in the past.
Snowflake's quarterly report provided the first spark. After the close on May 27th, Snowflake reported results, and its stock surged 36% the following day. The rally was driven not only by stronger-than-expected full-year guidance but also by a $6 billion deal with Amazon Web Services. A more critical signal was Snowflake's report of a significant rebound in customer demand for its AI-powered tools, powerfully reinforcing the market narrative that "software companies are AI beneficiaries, not disruptees." This provided sustained buying support for IGV for several days.
Nvidia CEO Jensen Huang's comments provided the second spark. On June 1st, at the Computex exhibition, Huang directly addressed concerns that AI would render software companies obsolete: "Many people say that with agentic AI, all software companies are going to go out of business. I say, on the contrary, because there will be so many agents. The world is no longer limited by the number of human resources, so these agents will use more tools than ever before." This endorsement from the heart of the AI ecosystem gave the highest-level validation to the software recovery narrative, and IGV rose another approximately 6% that day.
The short squeeze is the third spark. During the "SaaSpocalypse," significant short positions accumulated in the software sector. As prices rebounded strongly from multi-year lows, shorts were forced to cover, further amplifying upward momentum. Retail capital subsequently flooded in—Vanda Research data shows retail investors' net daily purchases of IGV reached $46 million, about 40% above the prior record.
Positioning Gap and FOMO: The Short Squeeze Logic Isn't Over
The key to understanding this rally lies in grasping the extreme positioning structure that previously existed in the software sector.
Data from JPMorgan's positioning intelligence team shows long positioning in software remains at the 1st percentile historically, while semiconductors are at the 97th percentile. Goldman Sachs had previously noted that the prior downtrend in US software exposure had turned into an "extreme washout."
This state of extreme under-positioning means any shift in sentiment can trigger a violent reallocation wave. In terms of actual trading behavior, FOMO (fear of missing out) is spreading to the individual stock level. According to Vanda Research, Hewlett Packard Enterprise (HPE) recently became the second-most purchased stock by retail investors—a stock that had never before appeared on Vanda's retail leaderboard. Retail buying of HPE over the last two sessions equated to its total purchases over the prior 11 months, causing its weekly implied volatility to spike significantly.
China's Internet Sector: The Asia-Pacific IGV or a Misleading Analogy?
The robust performance of US software stocks has quickly drawn market attention to another sector across the Pacific.
The Hang Seng Tech Index (HSTECH) recently surged nearly 5% in a single day, breaking above its downtrend line for the first time and reclaiming its 100-day moving average, breaking out of a months-long consolidation pattern. Among leading stocks, Tencent rose 10%—driven by rising market expectations for the imminent integration of an AI agent into its WeChat platform, as previously reported. Meituan gained 9% on signs of easing competition in food delivery subsidies.
JPMorgan has positioned China's internet sector as the "Asia-Pacific version of IGV" in a research note, suggesting that given the intensity of the software short squeeze, a similar catch-up narrative could lead to equally sharp moves if embraced by investors. The bank's data shows that measured by the JPMorgan China Internet Basket (JPCHINTE), the sector is down about 15% year-to-date and nearly flat over the past two months, significantly lagging the broader market. While hedge funds have added some exposure over the past 20 sessions, overall positioning remains at only the 38th percentile since 2018.
However, JPMorgan simultaneously highlights fundamental limitations to the IGV-China internet analogy. First, companies within IGV have shown consistently strong EPS trends throughout 2026, while China internet sector EPS has been largely flat for the past two years. Second, the business models are fundamentally different; US software companies and Chinese internet platforms are not directly comparable. The strategist points out that the IGV rebound is essentially sentiment-driven, not driven by earnings acceleration. For China's internet sector to evolve from a short-term squeeze into a sustained trend, it would require a tangible improvement in EPS trends or the clear establishment of an AI-driven growth narrative—"betting on an inflection in growth is much harder than riding an already-in-motion narrative."
Caution on Overbought Signals: The Squeeze is Here, Profit-Taking Takes Priority
Amid the exuberance, some market observers are already flagging near-term risks.
Market analysis indicates the software sector is currently at an extremely rare level of overbought conditions, last seen near the peak in late 2024. IGV is approaching a key resistance zone. While maintaining a constructive view on the sector, the analysis explicitly states it "would not add new long exposure here," instead favoring locking in some profits while maintaining upside exposure by rolling call options to higher strike prices.
From a longer-term perspective, software's strength appears more as a "rebound" on the historical chart rather than a trend reversal. The core question remains: after this historic short squeeze, how much room is left for the catch-up trade? The answer will largely depend on whether software companies can truly translate the AI narrative into visible, profit-level growth.
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