Wall Street Sees End to Software Sector's Decline

Software Stocks Rebound from AI-Driven Selloff

Overview

The S&P 500 software index has posted its best week since May, with the iShares Expanded Tech-Software Sector ETF (IGV) rising 13% since February 23. Despite this gain, software stocks still appear undervalued due to the selloff that began in the second half of last year.

Valuations

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A Goldman Sachs software basket is trading at 22 times forward earnings, compared to 21 for the S&P 500 Index. This multiple is significantly lower than the basket's 10-year average of 52. Salesforce Inc. is trading at less than 15 times earnings, down from its 10-year average of 46. Microsoft Corp. is trading at 22 times earnings, down from its 10-year average of 27.

Fundamentals

Despite concerns about AI disruption, software and services companies in the S&P 500 are projected to deliver 21% earnings growth in 2026, up from 17% at the end of 2025. In the fourth quarter, 93% of software companies in the S&P 500 beat profit estimates, compared to 74% for the broader index.

Buybacks and Sentiment

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The promise of buybacks is helping to lift software stocks. Salesforce and Wix.com Ltd. have pledged to aggressively repurchase beaten-down shares. Long-only investors on average were snapping up twice as many software shares as they were selling last week. Hedge funds have also flipped on the group, with bearish bets reaching the highest level in 17 years at the end of February.

Market Outlook

Options trading shows a shift in sentiment, with demand for exposure to the software sector surging as positioning moves from deeply oversold levels to active bullish re-engagement. Deutsche Bank strategists have turned overweight on software within the tech sector, citing the lack of negative revenue effects from AI in 2026.