Wall Street has repeatedly tried to call a bottom in software stocks only to be proven wrong, as the sector has been battered by fears that artificial intelligence will render many companies obsolete. However, this week's rebound is luring some bargain hunters back into the sector, hoping the worst may finally be over.
In just the past two trading sessions, a popular exchange-traded fund tracking the software industry surged 6.4%, Oracle jumped 18%, while Microsoft and Palantir Technologies Inc. each rose 6%.
Emily Roland, co-chief investment strategist at Manulife John Hancock Investments, stated, "I think the narrative that AI is going to destroy all software companies is a little bit hard to swallow, or at least premature."
This rally follows a prolonged period of weakness. The iShares Expanded Tech-Software Sector ETF closed Friday at its lowest level since November 2023 and remains down 24% for the year. Even after two days of gains, Oracle is still down 14% in 2026. Microsoft has fallen 18%, tying with Tesla as the worst performer among the so-called "Magnificent Seven" tech stocks.
The declines reflect persistent market concerns that products from AI companies like Anthropic and OpenAI will permanently weaken long-term demand for software, impacting pricing power, revenue growth, and profit margins, ultimately eroding the sector's historically high valuation multiples. However, this disruptive risk is more evident in market sentiment than in company financials. Furthermore, due to the prior sell-off, valuations have been significantly compressed, leading some investors to see a buying opportunity.
Roland added, "In many ways, fear has overtaken the fundamentals." She believes the selling has been overdone. The IGV ETF was up 2.5% in early trading Wednesday.
Software stocks pared gains Tuesday afternoon after a report from The Information stated that Anthropic is preparing to release a new AI-powered tool for designing websites and presentations. This highlights investor skittishness.
Adam Turnquist, chief technical strategist at LPL Financial, noted that market technicals also support a potential rebound for the software sector. The S&P North American Technology Software Index found support near the 1,600 level; a break above 1,908 could signal a "double bottom" breakout.
Turnquist said, "The software sector remains in a downtrend, and technical damage still needs to be repaired before a bottom can be confirmed. But improving momentum and volume trends suggest selling pressure may be easing."
In a show of confidence in the sector, prominent investor Michael Burry on Monday disclosed positions in several software companies, including Veeva Systems, Autodesk, and Adobe, the developer of Photoshop. Adobe's stock has fallen more than 30% this year, making it a poster child for AI disruption concerns.
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