The new “reality” of U.S. software stocks: Dip buying is hard to stop selling, and industry valuations may continue to decline

# Source: Cls.cn

Last week, U.S. software stocks were broadly sold off on fears that artificial intelligence would erode the industry's profits. Some analysts pointed out that the concerns surrounding the software sector have been overblown and that investors should buy the dips. However, other Wall Street insiders argued that software stocks have to face a new reality.

Daniel Newman, Chief Executive Officer of Futurum Group, stated that software stocks are being sold off every day, and the scope of companies impacted by artificial intelligence will keep expanding.

There was some bargain hunting in the software sector last Friday, which helped the iShares Global Tech Software ETF rebound from four consecutive days of declines in the first four trading days of last week, yet the losses have not been fully recouped. Over the past week, a total of 164 stocks in the software, financial services and asset management sectors have lost a combined $611 billion in market value.

Among them, financial research firm Morningstar suffered its worst week since 2009 with a 18% drop in its share price, while software companies HubSpot, Atlassian and Zscaler all saw their stock prices fall by more than 16%.

## An Unpredictable "Bottom"

Even before the slump in software stocks, other industries had already felt the threat. A tool released by Google last month, which can create digital worlds with simple prompts, once sent video game stocks into a tailspin.

The sell-off in software stocks triggered by Anthropic has further stoked market concerns about AI's disruptive impact on the landscape of various industries. In addition, disappointing earnings reports from some software companies have widened the scope of the impact.

As a leading global software giant, Microsoft's latest earnings report showed a slowdown in revenue growth for its cloud computing business, and coupled with its massive spending in the AI field, the company lost $357 billion in market value on the day the earnings were released. ServiceNow also reported underwhelming results, with its share price dropping nearly 14% last week.

Jackson Ader, software analyst at KeyBanc, said that established players have let investors down. If their performance and guidance both fall short of expectations, how can investors view the rest of the companies in the sector?

He also warned that over the past week, the market has repeatedly tested the valuation floor of the software and services sector and then broken through it quickly. Now, no one dares to easily claim that software stocks are cheap, because historically, valuations have been low for the past few months, and that has not stopped the sell-off at all.

The price-to-earnings ratio of a basket of software stocks tracked by Goldman Sachs has fallen to 21 times, a record low, and is far below the peak of more than 100 times at the end of 2021.

But some analysts pointed out that there are almost no signs of a decline in profits. Data shows that earnings of software and services companies in the S&P 500 are expected to grow by 19% in 2026, higher than the 16% forecast a few months ago. Michael Mullaney, Director of Global Market Research at Boston Partners, noted that if he were a growth fund manager, he would buy the dips.

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