Software Stocks Hit Multi-Year Lows: Is This a Buying Opportunity or a Value Trap?

Key Takeaways

Table of Contents

While the S&P 500 reaches new record highs, software equities continue to significantly underperform
IGV, the iShares Expanded Tech-Software Sector ETF, remains down 22% year-to-date despite a powerful recent rally
Major players including Oracle (up 24% this week), Microsoft, and Palantir (both up 11%) still show substantial annual losses
Emerging AI enterprises such as OpenAI and Anthropic entering corporate software markets pose significant risks to established business models
Market technicians maintain the sector remains in a downward trajectory and caution against premature entry

The software sector has experienced a dramatic rebound in recent trading sessions, yet market strategists remain skeptical about whether the worst is truly behind this beleaguered industry.

IGV, the iShares Expanded Tech-Software Sector ETF, has climbed over 11% across just three trading days—marking its most substantial three-session advance since the pandemic-driven volatility of March 2020. Despite this impressive spike, the fund continues to trade 22% below its 2026 starting point and recently touched levels not seen since November 2023.

Oracle has emerged as a standout performer with an approximately 24% surge this week. [[LINK_START_1]]Microsoft[[LINK_END_1]] and [[LINK_START_2]]Palantir[[LINK_END_2]] have both posted gains near 11%. However, context matters: Oracle still carries a 12% year-to-date decline, while Microsoft’s 15% drop positions it among the weakest performers in the elite Magnificent Seven group.

Oracle Corporation, ORCL

Meanwhile, the benchmark S&P 500 has reclaimed record territory, advancing roughly 1.8% since late February—a stark contrast to software’s continued struggles.

The AI Disruption Narrative Weighing on Valuations

Market sentiment has been driven primarily by anxiety. The investment community harbors deep concerns that artificial intelligence platforms developed by firms like [[LINK_START_4]]OpenAI[[LINK_END_4]] and Anthropic will commoditize traditional software offerings, making them vulnerable to rapid replication and obsolescence. This existential threat has systematically compressed valuations throughout the space.

The S&P North American Expanded Technology Software Index currently commands approximately 21 times forward earnings—a precipitous drop from nearly 40 times in July and substantially below the 10-year median of 34 times.

Certain companies have witnessed valuations collapse to unprecedented levels. Salesforce now trades at just 13 times projected earnings, compared to its 10-year average of 45 times. Adobe has fallen below 10 times earnings, a dramatic departure from its historical average of 30 times. Adobe has shed 30% of its value year-to-date.

Notably, prominent investor Michael Burry revealed new positions this week in multiple software companies, including Veeva Systems, Autodesk, and Adobe—moves that some market observers interpret as a bullish signal.

Wall Street’s earnings projections for the sector have also shown modest improvement. Software and services profits are now anticipated to expand 16.5% in 2027, up from the 15.7% growth rate forecast at February’s close.

Expert Perspectives on Current Market Conditions

However, not all market participants are convinced this represents a buying opportunity. Brad Conger of Hirtle Callaghan stated he has no interest in attempting to identify a bottom in the sector, regardless of attractive valuations. Additional skeptics emphasize that companies appearing secure today could suddenly face formidable AI-powered competitors tomorrow.

Technical market analysts remain equally circumspect. Adam Turnquist of LPL Financial characterized the sector as still entrenched in a downtrend with considerable “technical damage to repair.” He explained that confirmation of a sustainable bottom would require establishing a 50-day moving average breakthrough along with a pattern of ascending lows.

Paul Hickey and Justin Walters from Bespoke Investment Group warned this week that purchasing software stocks at current levels still resembles “catching a falling knife.”

The S&P North American Technology Software Index has established support around the 1,600 threshold. According to Turnquist’s analysis, a move above 1,908 could indicate a double-bottom formation and potential breakout.

Bloomberg Intelligence data projects that software and services company earnings will grow 16.5% in 2027.

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