Highlights:
– Software stocks are facing significant pressure due to fears of AI disrupting traditional business models.
– Citi identifies software companies that have corrected in value yet show improved earnings expectations as potential rebound opportunities.
– Major players like Microsoft and Palantir are highlighted as stocks to watch amid the uncertainty and volatility.
The State of Software Stocks in 2026
The software industry is currently experiencing a turbulence that threatens the stability of various companies within the sector. Recent concerns surrounding how artificial intelligence (AI) could render many existing “software as a service” business models obsolete have led to substantial sell-offs in software stocks. This downturn is evident, with the iShares Expanded Tech-Software Sector ETF (IGV) plummeting over 20% in 2026 and suffering an additional 8% drop just in February alone. The panic intensified further when AI startup Anthropic introduced new productivity tools, unsettling investor confidence across multiple sectors, including office real estate and wealth management.
This crisis of confidence is significant because it not only affects market valuations but also shapes perceptions about future growth in the tech space. As investors grapple with the implications of AI advancements, major software companies are facing increased pressure to justify their valuations in an ever-shifting landscape. So where do investors turn when faced with such volatility, and are there glimmers of hope amidst this challenging environment?
Finding Potential in the Midst of Decline
Despite the turmoil, Citi’s analysts are advocating for a closer examination of certain software stocks that appear to be undervalued yet possess improved earnings forecasts. In a February note, the firm analyzed the Russell 3000 and identified software companies with market caps exceeding $2 billion that had experienced a decline of at least 10% in their stock prices over the past month but showed higher consensus earnings-per-share (EPS) estimates for the upcoming years. As explained by Drew Pettit, Citi’s U.S. equity strategist, the focus should be on names that have not only corrected in price but have simultaneously seen expectations of earnings improvement.
Among the stocks identified are industry heavyweights like Microsoft, which has been the underperformer in the “Magnificent Seven” group for this year, along with Palantir—also reporting an earnings beat and offering positive revenue guidance despite its share price dip of nearly 37% from its previous high. The expectation is that as the initial panic subsides among investors, broader interest in these companies will resume, driven by robust fundamentals and an improved outlook over the medium term.
The Path Forward for Software Companies
The implications of this situation go beyond mere stock prices; they encompass broader market dynamics underpinned by technological advancement. A key challenge remains for software firms to communicate their value proposition convincingly amidst the noise surrounding AI. Analysts like Pettit suggests that a shift back to fundamentals will be essential in navigating this volatility, emphasizing that strong earnings momentum in the software sector could reignite investor interest.
Looking ahead, the question becomes whether the anticipated review of earnings will be enough to attract investors back into the software fold or if concerns about AI will continue to overshadow these stocks indefinitely. Potential solutions could lie in companies demonstrating strategic adaptability or innovation that aligns with AI capabilities, thus reassuring investors of their relevance. Additionally, as market conditions evolve, what criteria should investors consider when evaluating which software stocks to reinvest in?
In summary, while the current climate presents significant challenges for software companies, there are signals that certain stocks could potentially recover if fundamentals remain strong. As the industry navigates its way through this transformative era, the discussion surrounding value, innovation, and investor sentiment continues to be critical. How will companies adjust their strategies in response to AI disruptions? Are there particular indicators that could signal a reliable recovery for specific software stocks?
Editorial content by Jordan Fields
