Are US software stocks starting to rebound?

After experiencing months of continuous decline and historic valuation compression, the American Software, Inc. Class A sector saw a strong rebound this week. The market is engaged in a fierce battle between the extreme pessimistic narrative of "AI disrupting everything" and the contrarian investment logic of "fundamentals being wrongly killed." The iShares Expanded Tech Software Industry ETF (IGV.US) tracking the software industry surged by 6.4% over the past two trading days, with Oracle Corporation (ORCL.US) soaring by 18% and Microsoft Corporation (MSFT.US) and Palantir Technologies (PLTR.US) also recording 6% gains. Rebound background: Valuation compression to the extreme, from "AI doomsday" to panic pricing This rebound took place against the backdrop of a sharp correction in the software sector. The IGV ETF just closed at its lowest point since November 2023 last Friday, with a year-to-date cumulative decline of up to 25%. Even after the corrective rally this week, Oracle Corporation is still down 16% year-to-date in 2026, while Microsoft Corporation's 19% decline this year makes it one of the worst-performing constituent stocks among the "big seven tech giants." The continuous selling earlier stemmed from the market's deep concerns about AI-native companies (such as Anthropic and OpenAI) disrupting traditional software business models. Investors were worried that AI would permanently weaken enterprise software pricing power, revenue growth, and profit margins, thereby eroding the industry's long-standing high valuation premiums. However, this disruptive risk is more reflected in market sentiment rather than company financial data. Also, due to the previous selling pressure, valuations have been significantly reduced, and some investors see the opportunity to buy back in. Emily Roland, Co-Chief Investment Strategist at Manulife John Hancock Investments, commented on this: "The idea that artificial intelligence will destroy all software companies, I find that a little hard to accept, or at least premature." Roland further pointed out that panic sentiment has largely surpassed underlying realities, and market selling behaviors exhibit overreactions. From a valuation perspective, excessive panic has led software stock valuations to drop to historically rare low levels. Industry data shows that the S&P North American Expanded Technology Software Index, tracked by IGV, has an expected P/E ratio of about 21 times, not only far below the near 40 times peak in July but also significantly lower than its 34 times ten-year average. Looking at specific stocks, Salesforce, Inc. (CRM.US) has a P/E ratio of less than 13 times (ten-year average of 45 times), while Adobe (ADBE.US) has a P/E ratio below 10 times (ten-year average of 30 times), both are approaching historical valuation bottoms. Technical and fundamental resonances: Logic support for bottom-fishing funds Driving the capital inflow is not only cheap valuations but also marginal improvements in profit expectations. Industry research data shows that Wall Street analysts have quietly raised their expectations for the software sector recently, forecasting a 16.5% profit growth for software and service companies in 2027, up from the 15.7% forecast at the end of February. Revenue expectations have also shown a similar upward revision trajectory. "The fundamentals of the software industry aren't all bad," said Jonathan Dane, Chief Investment Officer of Defiant Capital Group, managing over $1 billion in family wealth. But all these stocks "have been lumped into the same disruptive narrative." He added that while he expects more volatility in the industry, "Microsoft Corporation and Oracle Corporation are becoming increasingly attractive." Technical signals also provide a basis for the rebound. Adam Turnquist, Chief Technical Strategist at LPL Financial, pointed out that the S&P North American Technology Software Index has found key support near 1600 points. Turnquist's analysis states, "Although the software industry is still in a downtrend, technical damage needs to be repaired before confirming the bottom, improving momentum and volume trends suggest that selling pressure may be marginally diminishing." If the index can effectively break through the resistance level of 1908 points, a bullish double bottom breakthrough pattern will form technically. Market sentiment indicators also show a reversal. Renowned investor Michael Burry, known for shorting the subprime mortgage crisis, publicly recommended his software company portfolio on Monday, including Veeva Systems (VEEV.US), Autodesk (ADSK.US), and Adobe (ADBE.US). It is worth noting that Adobe's year-to-date decline has reached 33%, making it a typical representative of AI disruption risk. Last week, veteran strategist Ed Yardeni also stated that U.S. tech stocks have fallen back from last year's historic highs and are now at attractive levels for investors willing to make long-term investments. Bill Baruch, head of Blue Line Capital, a giant asset management firm, also emphasized that software stocks have been "wrongly killed," with targets such as ServiceNow (NOW.US), Oracle Corporation, and Microsoft Corporation being attractive investments. He has already used half of his cash reserves to increase his position in the software sector. In addition, Wall Street investment banks have issued bullish views through research reports. Goldman Sachs Group, Inc. strategist Peter Oppenheimer explicitly stated that the technology sector correction presents a "value opportunity," with the forward PEG ratio of global tech stocks falling below 1 and the rolling PEG indicator at a low since 2005. Analysts continue to raise earnings expectations for 2026 and 2027, while high net earnings also support current valuation levels. Wells Fargo & Company also believes that tech stock valuations are at attractive levels for investors. Wells Fargo & Company's investment research institute has adjusted its rating on the sector from "neutral" to "bullish," citing the sector's underperformance relative to the S&P 500 index and its stable growth prospects supported by the widespread application of artificial intelligence. Cautionary voices still exist: Distinguishing between "resilient trees" and "zombie shrubs" Despite the bullish counterattack, some institutional investors remain cautious in the face of the uncertainty of AI technology's exponential iteration. Indeed, given the many challenges facing the software industry, such as slowing revenue growth and the rapid development of artificial intelligence (each update seems to herald a leap in capabilities), many investors are cautious about buying software stocks at low prices. In other words, a company that looks safe or cheap today may turn into a problem tomorrow. Jonathan Dane, Chief Investment Officer of Defiant Capital Group, managing over $1 billion in family wealth, acknowledges the increasing attractiveness of valuations but also warns of systemic risks: "The fundamentals of the software industry are not entirely black and white, but almost all related stocks have been lumped into the same disruptive narrative framework." He added that he relatively favors companies like Microsoft Corporation and Oracle Corporation that have both infrastructure properties. Brad Conger, Chief Investment Officer of Hirtle Callaghan & Co., showed more hesitation: "We prefer undervalued assets, and the software sector usually attracts us. But the more time we spend on this, the more uncertainty there is, so I'm not obsessed with finding the bottom accurately." Regarding future developments, Brian Kersmanc, portfolio manager at GQG Partners, vividly likened it to a "forest fire." The company manages assets of about $162.5 billion. Kersmanc stated, "Everyone has to go through the pains to complete industry cleansing. There may be a batch of zombie software companies in the market. This is like a forest fire burning off the bushes. Eventually, we will be able to see which trees are the most resilient."