After months of sustained downturn and historic valuation compression, the U.S. software sector staged a strong rebound this week. The iShares Expanded Tech-Software Sector ETF (IGV), which tracks the software industry, rose 6.4% over the past two trading sessions. Oracle (ORCL) surged 18%, while Microsoft (MSFT) and Palantir Technologies (PLTR) also recorded gains of 6%.
This rebound comes against the backdrop of a sharp previous pullback in the software sector. IGV ETF had just closed at its lowest level since November 2023 last Friday, with year-to-date losses reaching 25% at one point. Even after this week’s restorative gains, Oracle remains down 16% year-to-date in 2026, and Microsoft’s 19% decline this year ties it with Tesla as the worst-performing stock among the “Magnificent Seven” tech giants.
The sustained selling prior to this week stemmed from deep market concerns about AI-native companies disrupting traditional software business models, with investors worried that AI would permanently erode enterprise software’s pricing power, revenue growth, and profit margins. However, this disruptive risk is reflected more in market sentiment than in corporate financial data. Emily Roland, Co-Chief Investment Strategist at Manulife John Hancock Investments, commented, “The idea that artificial intelligence is going to destroy all software companies, I think that’s a little bit hard to swallow, or at least premature.” She noted that panic has largely outpaced fundamental realities.
From a valuation perspective, excessive panic has driven software stocks to historically rare lows. The S&P North American Expanded Technology Software Index, tracked by IGV, has a forward price-to-earnings ratio of approximately 21 times, far below its peak of nearly 40 times in July and significantly under its ten-year average of 34 times. Salesforce (CRM) now trades at a P/E of less than 13 times (compared to its ten-year average of 45 times), and Adobe (ADBE) has a P/E below 10 times (versus its ten-year average of 30 times). Both are nearing historical valuation bottoms.
Driving the return of capital is not only cheap valuations but also marginal improvements in earnings expectations. Wall Street analysts have recently quietly upgraded their expectations for the software sector, forecasting profit growth of 16.5% for software and service companies in 2027, up from the 15.7% projection at the end of February. Jonathan Dane, Chief Investment Officer at Defiant Capital Group, stated that the software industry’s fundamentals are not all bad, but nearly all stocks have been lumped into the same disruptive narrative. He is relatively more bullish on companies like Microsoft and Oracle, which also have infrastructure attributes.
Technical signals also provide a basis for the rebound. Adam Turnquist, Chief Technical Strategist at LPL Financial, noted that the S&P North American Technology Software Index found key support near the 1,600 level, suggesting that selling pressure may be marginally abating. Sentiment indicators have also reversed. Michael Burry, famous for shorting the subprime mortgage crisis, publicly endorsed his portfolio of software companies, including Veeva Systems (VEEV), Autodesk (ADSK), and Adobe. Goldman Sachs strategists explicitly pointed out that the tech sector pullback constitutes a “value opportunity,” and Wells Fargo Investment Institute has also upgraded its rating on the sector from “neutral” to “favorable.”
