MW Here's why software stocks are finally priced for a comeback and this veteran strategist is buying
By Barbara Kollmeyer
Tom Lee says software bounce could lower private-credit risk
Tom Lee says investors are underestimating how software companies will adapt to the AI challenge.
A war stalemate and lockdown in the Strait of Hormuz did not get in the way of the best month for the S&P 500 and Nasdaq since 2020.
For that, thank better-than-expected results for U.S. companies overall, and a massive rally for chip stocks. Mag 7 stocks MAGS are also back to levels seen at the start of the year, and then some.
However, the same cannot be said for software stocks, which have struggled amid AI disruption fears that keep popping up to pin down the sector. The S&P 500 Software Industry Index XX:SP1500.451030 is down 18% this year, versus a 5% gain for the overall index SPX.
Is it time to dip a toe? That's the view of Fundstrat's managing partner and head of research Tom Lee, who has just added software to his top sector picks in our call of the day.
Lee offers several reasons why he's now buying and the exposure he recommends is the iShares Expanded Tech-Software Sector exchange-traded fund IGV. First, he notes, software has just wiped out a stretch of underperformance since the lows around April 10. That ETF remains some distance below where it started the year, as this chart shows:
Secondly, the software industry's share of total revenue has doubled the rate of the S&P 500 from 2016 to the present, he said.
Lee believes that the sector is being underestimated by many regarding how it will cope with the AI threat. While it must evolve, "the best software companies will dynamically adjust and arguably leverage AI," he said.
And the bearish argument for the sector - that it's being eaten by AI - "is the equivalent of saying AI will hurt American biz, and then assume U.S. corporates will not adapt."
He lists what he sees as the five top software stocks today: Microsoft $(MSFT)$, Alphabet $(GOOGL)$ and Amazon (AMZN), along with Salesforce (CRM) and Adobe $(ADBE)$.
"Thus, we believe the risk/reward for software is asymmetric for the next 12-24 months and, given that consensus is cautious, this makes us believe the stronger companies will surprise to the upside. Thus, we would want to be overweight the sector into year-end," he said.
Read: How SaaSpocalypse fears actually bolstered SAP profits by over $150 million
Lee maintains that he doesn't see a V-shaped recovery coming for software stocks, but notes "the setup is favorable."
However, Lee said investors may need to be patient as the software play could take time to develop. He recalled how Fundstrat was positive on small-cap stocks in late 2024 and for most of last year, but that outperformance only got started in late-2025.
One more point the strategist makes is that if the stock values of software names start to recover, that will "mitigate the downside risk" of the private credit sector.
"Private credit and the surge in redemptions reflect investor apprehension about the future of software," he said. If Fundstrat gets this call right, software debt will fare better than Wall Street consensus believes at present, and underwriting capabilities are also doing better than thought.
This would be a positive development for stocks like Blue Owl $(OWL)$, Blackstone (BX), Apollo $(APO)$, Ares $(ARES)$ and KKR $(KKR)$.
Lee is known for making some bold and accurate calls, advising investors to buy stocks during pandemic lows and nailing the 2023 bull market. The S&P 500's finish of 6,845.50 last year was not far off his expectations for it to reach 7,000, and for this year, he predicted a trajectory similar to 2025 - periods of volatility until a year-end rally kicks in.
Read: The S&P 500's newest member is this under-the-radar software stock
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are pointing to a slight struggle for direction, while oil prices (CL.1) (BRN00) continue to move up.
Key asset performance Last 5d 1m YTD 1y S&P 500 7209.01 1.42% 9.51% 5.31% 28.64% Nasdaq Composite 24,892.31 1.86% 13.77% 7.10% 40.55% 10-year Treasury 4.388 8.10 6.80 21.60 7.40 Gold 4581.2 -3.05% -2.58% 5.75% 41.07% Oil 105.63 11.33% -5.74% 83.99% 80.84% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Comments from Iran and the U.S. in the past day indicate there's no peace plan on the horizon. President Donald Trump told reporters on Thursday that the Strait of Hormuz blockade is working.
Apple shares $(AAPL)$ are higher after the iPhone maker gave upbeat revenue guidance and showed it can handle rising memory prices.
The memory trade, however, appeared to wobble with shares of Western Digital $(WDC)$ and Sandisk $(SNDK)$ sliding after strong results. Both stocks have seen massive gains in the past year.
Reddit shares (RDDT) are surging after forecast-beating results from the social-media platform.
Roku stock $(ROKU)$ is climbing after an earnings beat and raising guidance from the streaming-device maker.
The Institute for Supply Management's manufacturing survey for April will be released at 10 a.m.
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The chart
Deutsche Bank sums up the just-ended month's financial market winners with this chart. "The main outperformer in April were equities, which had a very resilient performance, despite the wider concerns about stagflation and more hawkish central banks," said strategists Henry Allen and Jim Reid. Note the Nikkei 225 index JP:NIK beat all comers for the month. The index has bounced strongly back from a choppy few months and is up 18% for the year, well ahead of the S&P 500.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name NVDA Nvidia AAPL Apple BYND Beyond Meat TSLA Tesla META Meta MSFT Microsoft AMD Advanced Micro Devices MSFT Microsoft AMZN Amazon MU Micron Technology
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-Barbara Kollmeyer
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May 01, 2026 07:03 ET (11:03 GMT)
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