This year's software stock sell-off, which accelerated Tuesday, has alarmed investors, traders and analysts who worry the slide has further to go. Software stocks have been under pressure for some time, starting in the latter half of 2025, as fears of artificial intelligence disrupting the industry took hold. The iShares Expanded Tech-Software Sector ETF (IGV) has tumbled nearly 20% this year, and is more than 27% off its most recent high. It's down more than 5% just this week. But Tuesday's pullback has investors worrying the negative sentiment in the sector could persist for some time. The S & P 500 tumbled nearly 1% Tuesday, with shares of ServiceNow and Salesforce dropping close to 7%, each. Not even the Magnificent Seven stocks were immune, with Nvidia sliding roughly 3%. The shares were looking at a weaker open again on Wednesday. Vital Knowledge's Adam Crisafulli wrote in his daily market analysis note: "We think the software narrative is extremely overdone, and rarely has an industry been so oversold, but it will take some time for the sector to move out of the current morass of gloom." IGV YTD mountain IGV, ytd performance He pointed out that the overnight earnings action has done little to relieve investor fears. Automated data security company Varonis Systems is down more than 14% in the premarket on Wednesday, in spite of a beat on the top and bottom lines, adding to worries in the software space. Even Super Micro Computer's results overnight could be a "red flag" for the sector, Crisafulli said. While shares are higher in the premarket following Super Micro's beat, he noted that the company's reported gross margins of roughly 6.5% during a period of unprecedented demand is worrying. "The question is whether all this infrastructure will be utilized in an economic fashion, generating free cash flow and healthy margins for all the major participants, and that remains a big unknown," he wrote. NOW YTD mountain ServiceNow, YTD JPMorgan analyst Mark Murphy wrote in a note titled, "Software Collapse Broadens with Nowhere to Hide as AI Rate-of-Change Is Extrapolated in Both Logical and Illogical Ways," pointed out that the exit from software stocks has been indiscriminate of underlying fundamentals. "In our view, generalist money flows responding to the rapid AI product rate-of-change dynamic are overwhelming the deeper-thinking fundamental software sector specialists who are slightly more grounded in the principles that create stickiness for Enterprise software businesses," Murphy said. "These generalist money flows are invoking more knee-jerk selling, which is being exacerbated by index arbitrage basket selling, programmatic de-grossing, cross-correlation factor contagion, and a passive flow liquidity vacuum." In part, that means investors should stay on alert to software misses in the coming weeks, he wrote, given the negative reaction to even healthy earnings results. Investors have pivoted into other areas of the market that could benefit from AI, including energy, industrials and utilities. Internationals remain a favored asset class.
