AI fears hitting software stocks. Citi sees opportunity in many names
Worries over how artificial intelligence may disrupt software companies have shaken up those stocks, and Citi says some of them may be ripe for a rebound. Software stocks have struggled this year as investors fear AI will make “software as a service” business models obsolete. The iShares Expanded Tech-Software Sector ETF (IGV) is down more than 20% for 2026, and has fallen more than 8% in February alone. The software sell-off intensified in early February after AI startup Anthropic launched new tools within its Claude Cowork agent for legal, finance and product marketing matters. After a slight recovery, the stocks again fell after AI disruption fears spread to other sectors throughout the market, including office real estate and wealth management stocks . Citi sees opportunity amid the carnage, though. In a Feb. 9 note, strategists screened the Russell 3000 for software and services stocks with at least $2 billion in market cap. The names had to be down at least 10% over the past month and have 2025, 2026 and 2027 consensus EPS estimates that have been revised higher over the past six months. “We want to focus on names that have corrected, reducing implicit terminal multiples, but have actually seen earnings expectations improve,” wrote Citi’s U.S. equity strategist Drew Pettit. “Basically, who can still deliver near-term fundamentally, but has been de-risked from an exit multiple perspective medium-term.” Because of this, Pettit writes that these stocks are set to go higher, not based on technical support levels, but the fundamentals of their businesses. On the list is Microsoft , the worst performing “Magnificent Seven” stock in 2026. However, analysts on Wall Street are skeptical of its decline. Not only is it on Citi’s list, but Goldman Sachs and Wedbush have named the stock as one to buy amid the bearish environment. Palantir also made the list. The stock is off nearly 37% from its 52-week-high, despite delivering an earnings report earlier this month that beat Wall Street expectations. The defense tech company also gave rosy guidance for full-year revenue. As investor panic subsides, these software names should get interest from traders, according to Pettit. “A fundamental focus in a fully valued and more volatile bull market should be on earnings momentum for growth areas of the market like software,” he wrote. “However, that has not been a driver of differentiation in the latest leg of software weakness. We believe positive revisions for software stocks will be an important fundamental catalyst to drive investors back to names that have corrected with the broader industry group.”
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