Market professionals are increasingly of the view that software stocks have been excessively punished in recent weeks, with the sharp sell-off creating new opportunities to buy at low prices. Strategists from JPMorgan wrote in a Tuesday report to clients that the software market has potential for a rebound, based on "overly pessimistic expectations regarding AI disruption and solid fundamentals." Concurrently, Goldman Sachs CEO David Solomon stated on Tuesday that he views the sell-off as "too broad."
"The market seems to be pricing in a scenario where software prices plummet to zero. The one-sided nature of this trade is so pronounced that a rebound appears likely," said Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott. These stocks are currently at historically low levels. The forward price-to-earnings ratio for the S&P North American Software Index dipped below 20 for the first time last week. Although the index has since recovered to around 23 times earnings, it remains significantly below its long-term average P/E of 34.
Analysts at Jefferies, led by Brent Thill, noted in a Sunday client report that after studying 64 software stocks under their coverage, "42% are trading at or near their historical low valuation ranges." Michael Toomey from Jefferies' equity trading desk commented, "I believe software stocks are poised for a powerful rebound." Technical traders at BTIG echoed this sentiment, writing in a report last week that software stocks are "on the brink of a breakdown and should find a tactical low here."
Signs of a rebound are already emerging. A closely watched ETF tracking the software sector fell 15% over eight consecutive sessions from January 26 to February 4, but has since rallied 7.2%. According to Vanda Research, retail investor buying in this ETF reached "record levels," which the firm described as "one of the most aggressive retail dip-buying cases in tech, and software specifically, we have observed in our dataset."
While genuine uncertainty hangs over the sector, the sell-off has been so severe that even many companies expected to be long-term winners have been impacted. Market experts frequently cite companies such as Microsoft (MSFT.US), Snowflake (SNOW.US), ServiceNow (NOW.US), Salesforce (CRM.US), and Palantir Technologies (PLTR.US). Data analytics software firm Snowflake saw its shares drop 27% in just six trading days between January 29 and February 5. However, the company holds a strong position within the AI ecosystem. Last week, Snowflake signed a $200 million multi-year partnership with OpenAI, following a similar agreement with Anthropic PBC in December. In a February 5 report, Thill wrote that Snowflake is "one of the most obvious AI beneficiaries across all of public software." Institutions including UBS, Loop Capital, Wedbush, Bank of America, and DA Davidson have also expressed positive views on Snowflake.
Michael Mullaney, Global Director of Market Research at Boston Partners, noted the weakness in shares of Salesforce, ServiceNow, and Workday Inc. (WDAY.US). He stated that if his focus were on growth stocks rather than value stocks, he would consider buying these names on weakness. Datadog (DDOG.US) was also mentioned; its shares surged 14% on Tuesday, marking their largest gain since November, after the company reported strong earnings and provided a revenue outlook that exceeded expectations.
A core reason for the pessimistic sentiment in the software market is AI coding—the use of artificial intelligence to write software code. Concerns exist that if AI services from companies like Anthropic or OpenAI can replace existing software packages, they could exert significant pressure on the revenue, profit margins, and pricing power of the displaced companies. The recent stock plunge was largely triggered by Anthropic's release of an automation tool for legal work, followed by another tool focused on financial research. Prior to this, an AI tool from Alphabet Inc. contributed to sell-offs in video game and mobile advertising stocks. While this disruptive potential has been largely foreseeable, its ultimate scale remains unquantifiable.
Industry research forecasts that the software and services sub-sector is expected to achieve earnings growth of 14.1% in 2026. Although this growth rate is lower than the 31.7% expected for the overall technology sector—which benefits from a booming semiconductor industry—it exceeds the S&P 500's projected growth rate of 13.7%. A similar trend is observed in software sales.
"There is considerable speculation about what might happen, but nothing has materialized yet. The market is attempting to price in future risks, but for now, this seems more like conjecture than reality," said Janney's Luschini. Nevertheless, software skeptics do have some concerning signs. Monday.com (MNDY.US) shares fell 21% earlier this week due to disappointing revenue guidance. S&P Global (SPGI.US) also dropped 9.7% on Tuesday after issuing similarly disappointing performance outlooks. However, these cases appear to be exceptions rather than the rule. Data shows that among the 10 software companies in the S&P 500 that have reported earnings this season, all have beaten profit expectations, with eight surpassing revenue estimates. This outperforms the broader S&P 500, where the beat rates are 81% for earnings and 66% for revenue.
According to Mullaney, such performance indicates that the current trend is not severe enough to warrant a complete investor exodus from the software sector. "An earnings slowdown alone doesn't justify the magnitude of these stock declines. However, I believe concerns about AI disruption provide a reasonable basis for taking profits," he said.
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