The software stock reset

Funny how quickly things change: Just this week, we were talking about how memory stocks were rallying—today, the sector’s pulling back.

Software, on the other hand, is starting to make a comeback after months of getting steamrolled. The iShares Expanded Tech-Software Sector ETF is down 22.43% YTD, but bounced back 4.42% today, while Adobe jumped 3.79%, ServiceNow climbed 7.29%, and Workday ticked up 5.31%. And Oracle has had a fantastic week, gaining 18.2% over the last five days.

A buying opportunity

Analysts now say the recent AI panic is getting ahead of itself: Fears that tools like Anthropic’s Claude will disrupt the entire software industry look overblown, and the selloff has created a potential entry point for investors as valuations suddenly look attractive. Salesforce is trading at under 13x earnings, far below its 10-year average of 45x, while Adobe is below 10x, down from roughly 30x—both hovering near historic lows, according to Bloomberg.

Meanwhile, Bloomberg Intelligence is forecasting 16.5% profit growth in 2027 for software and services companies, up from 15.7% just a few months ago. Cheaper stocks and rising earnings is a winning combination.

One size doesn’t fit all

Sure, some stocks may be underperforming or exposed to AI disruption, but the problem is that all software names are being unfairly grouped into the same narrative, even as their underlying businesses remain strong. A prime example of this is Microsoft.

Shares of the Office 365 behemoth are down 14.97% YTD, and analysts argue that may present an attractive opportunity for investors. Bernstein notes that Microsoft’s muted Azure growth is justified, as a large allocation of capex is being directed toward AI models and first-party apps, with revenue growth expected in the next two quarters. Piper Sandler echoes that view, calling Microsoft one of the most defensible names given its ability to monetize the AI boom through Azure demand.

Bottom line: Markets are fickle, and stocks can swing with every headline—but if fundamentals are any indication, software’s recent selloff looks more like a reset than a collapse, with the strongest players still positioned to come out ahead.—SY