Software stocks suddenly rally even as the wider market undergoes turmoil
Are software stocks in the clear now? Software stocks are rallying this week, with the iShares Expanded Tech-Software Sector ETF (IGV) advancing almost 8% through early Thursday trading, even as the broader market was caught up with fear around the U.S.-Iran war. The S & P 500 is on its way to a losing week. Microsoft is among the most notable standouts as investors took the recent market selloff as an opportunity to buy a megacap suddenly on sale. The software giant — which peaked last July at $535.50 —is the best performer among the Magnificent Seven this week, up nearly 5% through early Thursday. The sudden rotation into the beaten down names has investors wondering if software’s woes are behind it, now that the sector’s showing signs of life. The software ETF remains 17% in 2026 and is down 25% from its September high. “I think we bottomed,” Liz Thomas, head of investment strategy at SoFi, told CNBC’s ” Halftime Report ” on Wednesday after saying that she bought the IGV. “I don’t think the entire space gets displaced.” The software ETF on Thursday was climbing for the seventh time in eight days. Overblown fears Software stocks crumbled in January (down nearly 15%) and February (off 10%) on fears that agentic artificial intelligence could make traditional software-as-a-service models obsolete. The selloff may have been overly discriminate. “I just am vexed, having been a software engineer, about this whole vibe coding thing,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “It’s way harder than people think.” Among the factors that make it unlikely that software-as-a-service companies (SaaS) will be displaced by AI is that trusted incumbents often have proprietary data, which is not easily replicable. Neither are enterprise customers likely to trust unproven AI models with data security. On top of that, any AI startups with disruptive features could also find themselves the targets of acquisitions by legacy companies, according to a note from Deutsche Bank Research. Perhaps the biggest tell that the software selloff may be overblown comes from the stocks themselves, with the overall market broadening out, and the S & P 500 managing to recover following a choppy Monday, a sharp selloff and recovery Tuesday and strong gains come Wednesday. “A rotation into a wider set of stocks despite strong earnings from tech is ultimately a sign of persistent risk appetite,” Luke Templeman, thematic strategist at Deutsche Bank Research, wrote in a note Wednesday. What’s likely is that, “once the dust settles on software fears, a rerating is likely.” More optimistically, Templeman said that information technology as a whole is now trading on par with the rest of the market, even below valuations seen during the 2022 selloff, at least in relative terms. Growth may fade To be sure, whether it’s time to buy back into software may well depend on what qualities investors are seeking. According to Forrest, who looks for stocks that offer growth at a reasonable price, the software sector has fewer appealing names than in the past. That means the upside could be capped for growth investors like her. “I see the reasonable price, but I just don’t see the growth,” Forrest said. “And the momentum people are probably not going to pile in because they weren’t seeing the growth either.” “And probably the value dividend people, they’re going to be the ones looking for enterprise software that pays dividends,” she said.
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