By Adam Levine
The best pair trade in tech through the end of April was to buy semiconductor ETFs and short software ones. Now software stocks are scraping themselves off the floor -- but are still behind the curve as big investors stick with what has worked.
The iShares Semiconductor exchange-traded funds was up 53% in the first four months of 2026, while the iShares Expanded Tech-Software Sector ETF declined by 21%. Spurred by what has so far been a successful earnings season, the software ETF is up 12% in May. The two funds are starting to trade together more.
Jefferies software analyst Brent Thill calls the rebound a correction from an overblown selloff. He doesn't see a major shift among big fund managers; they're sticking with semiconductors and other artificial-intelligence infrastructure sectors like energy.
While semi stocks rode the wave of the AI data center investment boom last year, sentiment soured on enterprise software makers like Atlassian, Workday, and Salesforce. Investors began to think through the implications of agents, software that can use AI models to accomplish a complex series of tasks from a simple conversational prompt. The first place agents got traction was among software developers, who are now able to let agents do a large portion of writing code while they focus on the big picture.
People began to wonder whether big software customers would just write their own software and replace their vendors. In its earnings report earlier this month, Palantir Technologies claimed that it had done just that, making a custom replacement for its customer relations management software, a market where Salesforce is the biggest player.
But the threat to software companies could be deeper. Agents can produce a lot more than code. And once they mature more, they could take over from people working in software. Typically, software companies charge customers by the human user, so agents could blow a hole in a revenue model that has been very successful. A new sales model based more on AI consumption may not be as profitable, and the very high gross margins these companies enjoy could get slashed.
Sometimes facts start to get in the way of a good story, and that is beginning to happen. Atlassian was the poster child for the software rout, down as much as 83% from its high last year. But Atlassian just kept plugging along, beating earnings and sales expectations for the last 10 quarters. When it reported its third-quarter earnings early this month, it surpassed analyst estimates handily and the stock surged by 30% the next day. It's still down 74% from its 2025 peak.
On Thursday afternoon, Workday reported its first-quarter earnings and beat the Wall Street consensus for earnings and sales for the 16th quarter in a row. The stock was up 5.6% in midday trading on Friday. It's still down 55% from its 2025 high.
Salesforce reports earnings next week, and it will provide a good test for the sector.
Meanwhile, the semiconductor ETF is on pace to hit a new high on Friday, up 163% in the past year.
Write to Adam Levine at adam.levine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 22, 2026 13:50 ET (17:50 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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