Following months of heavy selling pressure driven by concerns over AI disruption, software stocks appear to have found a bottom—at least for now. The S&P 500 Software Index just recorded its best weekly performance since May. The closely watched iShares Expanded Tech-Software Sector ETF (IGV) posted its strongest weekly gain in 11 months. Since February 23, the index has rallied 14%, after a dystopian vision of AI's future from Citrini Research previously triggered market turbulence. Although a pullback this week trimmed some gains, these stocks still look inexpensive due to the selloff that began in the second half of last year.
Goldman Sachs' basket of software stocks currently trades at a forward price-to-earnings ratio of 22 times, compared to 21 times for the S&P 500. Over the past decade, this basket averaged a P/E ratio of 52 times, while the S&P 500 averaged 19 times. Cloud software provider Salesforce (CRM) trades at a P/E below 15 times, significantly lower than its 10-year average of 46 times. Microsoft (MSFT) has a P/E of 22 times, below its 10-year average of 27 times. "We see a significant disconnect between valuations and high-quality fundamentals, and the perceived risks seem exaggerated," said Hua Cheng, a portfolio manager at Mirova, which manages $39 billion in assets.
"Risk" has been the keyword surrounding software makers as investors worry about AI's impact on these businesses. The logic is that if AI agents can write code, companies could build their own software suites, potentially rendering purchased software services obsolete. With each new development from AI startups like Anthropic and OpenAI, stocks across sectors—from finance to travel, and certainly software—faced selling pressure. In fact, on the same day Citrini's report was released, IBM's stock plummeted after Anthropic unveiled a tool that fueled these very concerns.
Throughout the selloff, despite many software bulls arguing that fears over profit and revenue growth prospects were overblown, stock prices continued to fall. This ultimately led the IGV ETF to drop 35% from its September peak to its recent low on February 23. Since then, software stocks have been staging a rebound. According to data from Deutsche Bank Securities, after bearish positions reached a 17-year high at the end of February, hedge funds have turned bullish on the sector. A Goldman Sachs basket tracking software and semiconductor companies has risen about 9% this month as investors cover short positions in software and unwind crowded chip trades.
Options trading reflects a similar shift in sentiment, with demand for exposure to the software sector surging as positioning moves from deeply oversold levels to active bullish engagement. One factor driving the rebound was an event hosted by Anthropic on February 24, where the company showcased new tools developed in collaboration with several established companies that had been in traders' crosshairs. Another factor is fundamentals. Even as stock prices were sold off, profit expectations for 2026 have been rising. Data shows that software and services companies in the S&P 500 are projected to achieve 21% earnings growth this year, up from 17% at the end of 2025. In the fourth quarter, 93% of software companies in the S&P 500 beat profit expectations, compared to 74% for the broader index.
"After consulting various experts, generalists, Gemini, ChatGPT, and Claude, we still have not encountered any software company expecting AI to negatively impact revenue in 2026," wrote Deutsche Bank strategists in a report issued on Tuesday, in which they upgraded software stocks within the tech sector to "overweight." "We believe fears of AI disruption have peaked." This may explain the surge in buying. Michael Toomey, Managing Director of Equity Trading at Jefferies, noted that last week, long-only investors bought, on average, twice as many software shares as they sold. "Such an extreme skew is noteworthy," he said. "Peak hysteria has just washed everyone out."
Buyback commitments have also helped bolster share prices. Salesforce and Wix.com Ltd. are among the software firms that have pledged aggressive share repurchases for their battered stocks. Salesforce plans to sell up to $25 billion in debt to fund its buyback. "We increased our stock repurchase authorization to $50 billion because these prices are just too low," CEO Marc Benioff stated on the company's earnings call on February 25. "This is not our first 'SaaS-apocalypse'." Wix, with a market capitalization under $5 billion, commenced a "modified Dutch auction" tender offer last week to repurchase up to $1.75 billion worth of shares. Executives at Intuit Inc. indicated on their earnings call late last month that the company also aims to "significantly increase" buybacks this year.
Such announcements are typically positive signals, according to Chris Galipeau, Senior Market Strategist at Franklin Templeton. "If you are a CEO and announce this, the only reason you do it is that you believe your business is well-positioned, the surrounding fears are overblown, and it's the best use of capital you see," he said. However, signals from insider buying remain absent. Data compiled by Washington Service shows that software company executives purchased $30.9 million worth of stock in December, the highest level in nearly two years. This trend slowed significantly as the stock selloff intensified in January and February. "It's not just stock buybacks, but accelerated buybacks, which highlights management's confidence in the outlook," Galipeau added. "Insider buying could further reinforce that signal."
Oracle Corporation's stock valuation has declined.
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