Software Shows the Stock Market's Rise Is More Rational Than You Think -- Barrons.com

By Josh Schafer

Markets finally took a breather last week after an historic run. Investors pivoted away from skyrocketing tech stock as the Nasdaq fell more than 4% in a single session on Friday. The downturn is notable, but spirits are still high as the world awaits the largest IPO on record -- so much so that some market watchers have warned it all feels a bit too euphoric. Today I'm breaking down why I think the market's meteoric rise is still rational, and how the software sector proves that investors are grounded in reality.

-- Josh Schafer, Barron's Investor Circle

What a run. Someone asked me recently if the stock market is in a bubble.

The question came one day after Marvell Technology stock added 33% in its best single trading session ever, boosted by public comments from Nvidia CEO Jensen Huang that the company would someday be worth $1 trillion. It's not just Marvell soaring to new heights. In April and May, the S&P 500 rose 16% for its best two-month stretch since 2020, driven by a nearly 51% rally in the tech sector since March 30.

But despite the heady stock jumps and widespread markets FOMO, investors are a lot more discerning than they seem. That was true even before Friday's selloff, and there's no industry that shows it better than software.

The sector was written off earlier this year when investors predicted a " SaaSpocalypse," and questioned if software companies would eventually be replaced by AI. The broad iShares Expanded Tech-software ETF -- commonly used to track the industry's performance -- declined by 30% in 2026 at its low this year. But it has come back with a vengeance, rising more than 21% in May for its best monthly performance since 2001.

Not all software stocks are surging though, and the market is clearly picking its favorites (as I discussed in February). "The winners operate where AI directly benefits them -- cybersecurity, chip design software, and cloud platforms -- and stand to gain as long as AI investment remains robust," writes Jessica Rabe, co-founder of DataTrek research. "The laggards sit squarely in AI's crosshairs: creative tools, CRM, workflow automation, and productivity software, where investors are reassessing the durability of their competitive advantages and future growth."

We've seen this divergence within our own Barron's Investor Circle picks. Okta and Oracle have proven to be solid opportunities for those who bought the dip this year when we recommended them in February and March, respectively. Both stocks are now up more than 50%, and topped Wall Street's earnings estimates in their most recent reports. Cybersecurity play Palo Alto Networks also fits the bill for what's working in software, and is up more than 50% since we picked it in late April.

We've been on the other side of the trade too, though. Salesforce stock is down nearly 30% since our late December 2025 recommendation. The company's latest earnings were strong, but investors have changed their minds about how much they're willing to pay. Rabe notes that valuations for companies like Salesforce are unlikely to expand "without clearer evidence that AI can enhance, rather than erode, incumbent business models."

Tech might be powering the stock market right now, but not everyone is part of that upswing. And how a company is incorporating AI remains a key determinant of whether or not their stock is participating in the rally.

That doesn't really sound that bubbly at all.

Chart of the Week

There's no doubt that tech stocks are driving markets right now, so much so that some investors have warned about the pitfalls of a narrow market rally.

But the current upswing looks a lot different than previous tech runs, and a new stock market trend is emerging in 2026: AI is broadening gains within the sector itself.

Our chart of the week shows the one-year performance of Invesco's S&P 500 Equal Weight Technology ETF, compared to State Street's Technology Sector ETF and Roundhill's Magnificent Seven ETF.

Invesco's equal weight ETF puts the same emphasis on all tech stocks to avoid a scenario in which a few large companies dictate performance. It shows the market's recent surge isn't about a few stocks controlling the market action. In fact, inside the equal-weighted technology ETF, not a single member of the Magnificent Seven cracks the top 20 best performers of the year.

What to watch in the markets this week

   -- Inflation data. The final inflation reading before the Fed's next meeting 
      will hit the tape on Tuesday morning. Consensus expects the May consumer 
      price index to show prices increased 0.5% month over month and 4.3% from 
      the prior year, according to FactSet data. Stripping out food and energy, 
      core CPI is also expected to rise 2.9% year over year, compared to 2.8% 
      in April. 
 
   -- SpaceX's IPO. The largest IPO in history is expected to begin trading on 
      Friday. Two weeks ago we warned that investors should expect a bumpy ride 
      given SpaceX's lofty valuation. The IPO could serve as a barometer for 
      broader risk sentiment in the market this year, especially as Anthropic 
      and OpenAI get ready to make their public market debut. 
 
   -- Other economic data in focus. The Producer Price Index (Thursday), 
      University of Michigan Consumer Sentiment (Friday). 

Live Q&A

SpaceX will probably go public this week. During our latest live Q&A show, I asked our resident Elon Musk reporter Al Root whether or not he'd be buying the SpaceX IPO.

Click below to hear Al's take.

Are you planning to buy the SpaceX IPO? Click here to discuss in our Circle Conversation.

A reminder: Our live Q&As are now on a monthly cadence. We're answering your questions on our stock picks and anything top of mind about the current market environment with a reporter roundtable that includes myself, two of our stock pickers and our senior technical analyst Doug Busch. Our next show will be on June 24 at noon. Sign up for the show here.

On our Radar

🤯 Okta is up about 50% since Barron's Investor Circle picked it in February, largely thanks to a recent surge as investors digested a better-than-expected full-year outlook from the tech company. Dan Victor details how AI is boosting Okta's business rather than destroying it as some had feared.

🏀The New York Knicks are back in the NBA Finals for the first time since 1999. Andrew Bary's stock pick has been taking off along with the team's success. Madison Square Garden Sports Corp, which owns both the Knicks and the NHL's New York Rangers, is sitting at an all-time high. Shares are up nearly 80% since Andrew argued in September 2025 that shares were too cheap given the premium valuation that should be placed on the Knicks.

🛑 We dropped our CarGurus stock pick after it fell 19% from our initial March recommendation. Dan Victor explains why.

In case you missed it

   -- Chart of the Week: Freeport-McMoRan Builds Strong Base, Suggesting 
      Imminent Breakout. -- Doug Busch 
 
   -- BrightSpring Health Services: Quantitative Stock of the Week -- Vestmo 
      Global Research 
 
   -- Motorola's Record Backlogs Are Radioing a Buying Opportunity -- Todd 
      Chanko 
 
   -- Chart of the Day: Bitcoin Is Flashing Warning Signs -- Doug Busch 
 
   -- Marvel, HPE Rallies Show Even a Narrow Rally Has Opportunity -- Josh 
      Schafer 

Write to Josh Schafer at josh.schafer@barrons.com. Follow him on X and subscribe to his Substack Searching for Signals with Barron's.

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June 08, 2026 06:55 ET (10:55 GMT)

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