A recent rally in software stocks is proving to be short-lived, and investors are bracing for more selling as fears linger about artificial intelligence disruption.
The iShares Expanded Tech-Software Sector ETF, known by its ticker IGV, turned positive for the year earlier this month after jumping 16% over three days following some strong earnings reports. But that ended abruptly on June 1, and the exchange-traded fund is now on track for an eight-session losing streak in which it has given back the entire gain. Software is the worst performing group in the S&P 500 Index over that time, and the ETF is down more than 14% in 2026, while the S&P 500 is up 6.3%.
The software ETF fell as much as 2.9% on Thursday before paring those losses to less than 1%.
“We think there’s further downside even with the weakness we’ve seen,” said Mike Bell, head of market strategy at RBC BlueBay Asset Management. “The concern isn’t simply whether software companies will grow at the rates they did in the past. It is a genuinely existential threat, because the product may frankly no longer be necessary when AI can do it itself.”
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Software stocks have come under heavy scrutiny this year as competition from startups like Anthropic and OpenAI prompted a broad retreat from the sector. That’s compressing earnings multiples, which used to be among the highest in technology. Those anxieties were fanned on Tuesday after Anthropic released a version of its Mythos AI model, contributing to a 2.8% drop in IGV.
“Traditional valuation metrics aren’t as useful when the band of uncertainty is so high, and it’s fair to say uncertainty is a lot higher than it’s been in the past,” Bell said.
Still, results this earnings season have been encouraging with 90% of software companies in the S&P 500 beating profit estimates, compared with 82% for the broader index, according to data compiled by Bloomberg. And software firms presenting at Bank of America’s global technology conference earlier this month showed “consistent optimism across the landscape,” the bank’s analysts wrote in note to clients on June 8.
Winners include Snowflake Inc., Datadog Inc., DigitalOcean Holdings Inc., and JFrog Inc., which all reported robust results that exhibited their strong positions in the software ecosystem. Cybersecurity has also been a bright spot this year.
The next notable earnings report will come from Adobe Inc. after markets close on Thursday. The maker of software for creative professionals is considered a major risk for AI disruption because those tools are so good at image generation.
The stock is down 36% this year, including a drop of 3.7% on Thursday, and it doesn’t have a great post-earnings track record, falling after nine of its previous 11 earnings reports. Last quarter, long-time Chief Executive Officer Shantanu Narayen said he would step down as the company faces questions over its ability to navigate the AI transition.
The selloff has made Adobe relatively cheap, trading at less than 10 estimated earnings, compared with a 10-year average of about 30 times. Still, investors are reluctant to jump in.
“It’s hard to conceive of what Adobe’s competitive moat might be, and that means it seems like a company that could be displaced,” said Fiona Ker, a fund manager at Ruffer, which has about $26 billion in assets. She’s been initiating positions in some battered software stocks like Salesforce Inc. but draws the line at Adobe.
Expected initial public offerings for OpenAI and Anthropic also could weigh on legacy software stocks. Anthropic, the maker of the Claude chatbot, could hold its IPO as soon as October, while OpenAI is reportedly targeting a potential listing as soon as the fall.
“These IPOs could have direct implications, since investors want to avoid AI losers and be overweight in names that will do well,” RBC BlueBay’s Bell said. “These are clearly obvious potential AI winners people can allocate to.”
It’s easier to feel more confident about the prospects of companies with large enterprise clients that could face legal or compliance issues if they change providers, according to Ruffer’s Ker.
“What AI can do is a moving target, and that’s a big problem if you’re trying to bake in what sustainable growth could look like,” she said. “However, when I look at them, I see decent free-cash-flow yields and below-market multiples. That’s an attractive opportunity set, and I think you’re being compensated for the uncertainty.”
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Earnings Due
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Earnings Postmarket:
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