Software stocks are showing early signs of recovery after months of heavy selling, with analysts debating whether the sector has reached a lasting bottom.
The S&P 500 software index logged its strongest weekly performance since May 2025 last week, while the iShares Expanded Tech-Software Sector ETF (IGV) has rebounded about 10% from its February low.
Despite the bounce, the ETF remains down roughly 20% so far this year, underperforming broader global equities, which have been largely flat.
Positioning clouds outlook for a sustained recovery
Analysts at Barclays say the recent rally may reflect improving sentiment but caution that investor positioning continues to be a key factor.
“While hedge funds have materially reduced exposure, long-only portfolios remain heavily invested. Therefore, despite increasingly attractive valuations, this positioning backdrop makes it difficult to call a definitive bottom in software,” write Barclays analysts including Sven Merkt in a Monday note.
“That said, we see the current levels as very attractive for long-term focused investors.”
The bank added that fresh developments in artificial intelligence could continue to pressure valuations, particularly as new tools and capabilities raise questions about the long-term demand for traditional software products.
Analysts see disconnect between valuations and good quality fundamentals
Concerns over the impact of AI have been central to the sector’s decline.
Investors worry that increasingly capable AI agents could allow companies to build their own software solutions, reducing reliance on established vendors.
Announcements from firms such as Anthropic and OpenAI have repeatedly triggered selloffs across software and other industries.
Shares of International Business Machines, for instance, came under pressure following the release of new AI tools that underscored these risks.
However, some investors argue the fears may be overdone.
Portfolio managers point to a disconnect between valuations and underlying fundamentals, suggesting that the market may be pricing in overly pessimistic scenarios.
“We see a big disconnect between valuations and high-quality fundamentals, where the risks seem exaggerated,” said Hua Cheng, a portfolio manager at Mirova, which has $39 billion in assets in a Bloomberg report last week.
Fundamentals remain resilient despite selloff
Even as stock prices declined, earnings expectations have held firm.
Software and services companies in the S&P 500 are projected to deliver around 21% earnings growth this year, up from earlier estimates of 17%.
Corporate performance has also been strong.
In the fourth quarter, 93% of software firms in the index exceeded profit expectations, significantly higher than the broader market’s beat rate.
“After asking various experts, generalists, Gemini, ChatGPT and Claude, we have still not come across a single software company that expects a negative revenue effect from AI in 2026,” Deutsche Bank strategists wrote in a note released last week in which they turned overweight on software within the tech sector.
“We think AI disruption worries have peaked.”
The shift in sentiment is also visible in market activity.
Hedge funds have started to unwind bearish positions after short bets reached their highest level in 17 years in February, the Bloomberg report noted.
Meanwhile, a basket tracking software stocks versus semiconductors compiled by Goldman Sachs has risen about 9% this month, driven by short covering and rotation out of crowded chip trades.
Options data similarly indicates renewed bullish interest, with investors re-engaging after the sector reached deeply oversold levels, the Bloomberg report said.
Selective opportunities emerge in AI transition
Amid the uncertainty, analysts are increasingly focusing on companies best positioned to benefit from AI rather than be disrupted by it.
Barclays identifies SAP as a leading beneficiary, citing its ability to embed AI into enterprise workflows such as finance, supply chain and procurement.
“SAP could be a real AI beneficiary if the company executes,” the analysts wrote, assigning the stock an Overweight rating and maintaining a €240 price target.
Other firms seen as relatively well positioned include Temenos and Dassault Systèmes, supported by strong industry-specific advantages.
Temenos, in particular, is viewed as largely insulated from AI disruption due to high switching costs, regulatory complexity and entrenched positions in core banking systems.
Still, analysts warn that the path forward for software stocks is unlikely to be smooth.
While valuations appear increasingly compelling for long-term investors, uncertainty around AI’s ultimate impact and shifting investor positioning suggest volatility could persist in the near term.
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