The New "Reality" for U.S. Software: Dip-Buyers Can’t Stop the Bleeding as Valuations Search for a Floor

U.S. software stocks took a beating last week as a wave of selling swept through the sector, fueled by fears that AI is moving from a tailwind to a profit-killer. While a handful of analysts argue the panic is overdone and the sector is now in the "buy the dip" zone, much of Wall Street believes software players are finally facing a reckoning.

 

Daniel Newman, CEO of The Futurum Group, put it bluntly: software is getting dumped daily, and the list of companies finding themselves in the crosshairs of AI disruption is only getting longer.

 

We saw some bargain hunting on Friday, which helped the iShares Expanded Tech-Software Sector ETF snap a four-day losing streak, but the recovery was a drop in the bucket compared to the damage done. In just one week, a group of 164 stocks across software, fintech, and asset management saw a combined $611 billion in market value vanish into thin air.

 

Morningstar logged its worst week since 2009, sliding 18%, while software darlings like HubSpot, Atlassian, and Zscaler all took hits of more than 16%.

A Bottomless Pit?

The software rout didn't happen in a vacuum. Other industries had already felt the chill—last month, a Google tool that creates digital environments from simple prompts sent video game stocks into a tailspin.

 

But the recent sell-off triggered by Anthropic’s latest moves has ramped up the collective anxiety over AI’s power to upend the status quo. To make matters worse, several heavyweights failed to deliver on the earnings front.

 

Even Microsoft wasn't immune; a slowdown in cloud growth combined with eye-watering AI spend wiped out $357 billion in market cap in a single day. ServiceNow followed suit, dropping nearly 14% last week after its own guidance failed to impress.

 

Jackson Ader, a software analyst at KeyBanc, noted that when the industry’s "North Stars" start disappointing, it casts a long shadow over everyone else. He warned that the market spent the week testing valuation floors, only to crash right through them. "It’s hard to call these stocks 'cheap' now," Ader said. "They’ve looked cheap for months on paper, and it hasn't done a thing to stop the selling."

 

Indeed, a basket of software stocks tracked by Goldman Sachs has seen its P/E ratio shrivel to a record low of 21x—a far cry from the triple-digit peaks seen in late 2021.

 

Still, the bulls aren't completely gone. Some analysts point out that the actual "earnings apocalypse" hasn't shown up in the data yet. In fact, 2026 earnings growth for S&P 500 software firms is projected at 19%, up from the 16% expected just a few months ago. As Michael Mullaney of Boston Partners put it, if you’re a growth-focused manager, this looks less like a crisis and more like a massive opportunity.