As software stocks plunge, Wall Street remains unconvinced and continues to buy the dip!

Artificial intelligence disruption panic has caused heavy losses in the software sector, but some Wall Street investors believe market panic has surpassed actual changes in fundamentals, and the sharp correction in valuations is creating buying opportunities.

The S&P North American Expanded Technology Software Index currently trades at a P/E ratio of 21x, down from 40x last July and below the 10-year average of 34x. Salesforce and Adobe’s valuations are approaching historic lows; yet earnings expectations for software companies have been revised upward.

This week, software stocks saw two days of strong rebound, with a popular ETF tracking the sector rising 6.4% over two days. Emily Roland, Co-Chief Investment Strategist at Manulife John Hancock Investments, said, "The idea that AI will destroy all software companies is a bit hard to accept—at least, it’s far too early."

However, the path to bottom-fishing is controversial. While some investors see the rebound as a good chance to build positions, institutions remain cautious about structural risks in the software sector. According to previous articles by Wallstreetcn, Goldman Sachs believes the strong rebound in U.S. software stocks is merely a technical squeeze triggered by overselling, not a fundamental improvement.

Technical Rebound After Heavy Selloff

This round of rebound occurred against the backdrop of continued weakness in software stocks. The iShares Expanded Tech-Software Sector ETF (ticker: IGV), which tracks the software industry, closed last Friday at its lowest price since November 2023, with a year-to-date decline of 24%.

There are also some signals of technical support in the market. Adam Turnquist, Chief Technical Strategist at LPL Financial, pointed out that the S&P North American Technology Software Index found support near 1600 points. If it breaks above 1908 points, a double-bottom breakout technical pattern will be unlocked.

However, he also cautions, "The software sector remains in a downward trend; technical repair is not yet complete, but improvements in momentum and volume suggest the selling pressure may be waning."

Notably, on Tuesday afternoon, gains in software stocks narrowed. The catalyst was a report by The Information that Anthropic is preparing to launch an AI tool for website and presentation design. This news immediately triggered market sensitivity about AI replacing software, reflecting investor sentiment that remains fragile.

Significant Valuation Compression, Fundamental Expectations Improving

What supports the bottom-fishing logic is not only technicals, but also dramatic reassessment of valuations. The S&P North American Expanded Technology Software Index currently trades at around a 21x P/E ratio, sharply contracting from nearly 40x last July and well below the 10-year average of 34x.

Some leading software stocks have valuations already at historically low levels. Salesforce currently trades at less than 13x P/E, compared to its 10-year average of 45x; Adobe’s P/E falls below 10x, more than 60% lower than its 10-year average of 30x, both approaching historical lows.

Meanwhile, Wall Street analysts are raising earnings expectations for the sector. According to Bloomberg Industry Research, profit growth expectations for software and service companies in 2027 have risen from 15.7% at the end of February to 16.5%, with similar improvements in revenue forecasts.

Jonathan Dane, Chief Investment Officer of Defiant Capital Group, which manages over $1 billion in family wealth, said, "The fundamentals of the software sector are not worthless, but all stocks have been labeled with the same ‘disruption narrative.’"

Disagreements Persist: How Deep is the AI Threat?

The fundamental disagreement between bulls and bears lies in the depth and speed of AI disruption.

Bulls argue that current market panic has gone beyond actual changes to fundamentals, with sentiment dominating pricing; bears worry that every iteration of AI capabilities may bring new shocks and that the software companies' moats are hard to assess.

Brad Conger, Chief Investment Officer of Hirtle Callaghan & Co., said candidly, "We prefer undervalued assets; software stocks would normally interest us. But the deeper our research, the greater the uncertainty. I’m not interested in bottom-fishing."

Brian Kersmanc, portfolio manager at GQG Partners, which manages about $162.5 billion in assets, used a "forest fire" metaphor for the current state of the software industry: "Everyone must go through the pain to get to the other side. There may be some 'zombie software companies' in the market. This big fire will clear the underbrush, and eventually, we’ll see which big trees are the strongest."

In his view, as the AI bull cycle evolves, winners and losers will eventually emerge—the question is only when.

Risk Warning and DisclaimerThe market carries risk, and investment requires caution. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their particular situation. Investments based on this article are at your own risk.