Software Stocks Suffer Worst Day in 10 Months: Semiconductor Outperformance Deepens

This analysis is based on the MarketWatch report [1] published on January 29, 2026, which documented a pronounced sector rotation in technology investing. Software stocks experienced their most significant single-day decline in ten months, while semiconductor equities continued their robust performance trajectory. The divergence highlights a fundamental shift in how tech investors are allocating capital, with semiconductor and AI chip plays attracting inflows while software positions face sustained outflows.

The MarketWatch article examined the best and worst-performing S&P 500 stocks year-to-date, revealing a stark contrast between semiconductor strength and software weakness [1]. This sector rotation represents one of the most significant capital reallocation events in the technology space in recent memory.

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The performance divergence between software and semiconductor sectors on January 29, 2026, was pronounced and illustrative of broader market trends:

Instrument	Daily Change	Trading Volume	Relative Performance
IGV (Software ETF)	-2.35%	23.30M shares	Severely Underperforming
SOXX (Semiconductor ETF)	+0.04%	8.25M shares	Resilient
SMH (Semiconductor ETF)	+0.02%	9.24M shares	Resilient
NASDAQ Composite	-0.64%	6.27B shares	Broad Tech Weakness
S&P 500 Technology Sector	-0.33%	—	Sector Decline

The iShares Expanded Tech-Software Sector ETF (IGV) declined 2.35% on exceptionally heavy trading volume of 23.30 million shares—more than double its average daily volume [0]. This volume spike suggests significant institutional capitulation or strategic reallocation out of software positions. In stark contrast, semiconductor ETFs SOXX and SMH managed modest gains despite broader market weakness, demonstrating the sector’s resilience and investor conviction [0].

Analyzing the 10-trading-day period from January 15 to January 29, 2026, reveals an extraordinary performance gap:

• Opening price: $337.22 (January 15)
• Closing price: $361.13 (January 29)
• Period Gain: +7.08%
  [0]

• Opening price: $99.78 (January 15)
• Closing price: $92.27 (January 29)
• Period Decline: -7.53%
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The year-to-date performance differential of approximately

between semiconductors and software represents one of the most significant sector rotations in recent technology market history [0]. This divergence signals a fundamental shift in investor sentiment and capital allocation strategies within the technology sector.

The capital flow from software to semiconductors reflects several converging factors that have strengthened throughout early 2026:

The semiconductor rally is being propelled by robust AI infrastructure investment, with major technology companies allocating substantial capital to AI data center development [3]. The recent $500 billion Taiwan-US chip deal has reinforced sector tailwinds, providing long-term visibility into supply chain investments [3]. Taiwan Semiconductor Manufacturing Company’s (TSMC) January 15 earnings release revealed guidance surpassing analyst expectations, validating the strong demand environment for advanced semiconductors [4]. Additionally, Nvidia’s approved $105 million Taiwan headquarters plan further signals commitment to the semiconductor supply chain and AI chip development [5].

The software sector faces mounting headwinds from multiple directions. The narrative that AI is “starting to eat software” has gained traction among investors, who increasingly favor pure-play AI chip companies over traditional enterprise software [2]. Enterprise software spending has shown signs of fatigue as corporations prioritize AI infrastructure investments over traditional software deployments. Valuation concerns persist as software stocks, which benefited from pandemic-era growth multiple expansions, face pressure in an elevated interest rate environment [2].

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The trading volume data provides crucial insight into the nature of this sector rotation. IGV’s trading volume of 23.30 million shares on January 29—more than double its average—suggests institutional-scale selling and strategic repositioning [0]. This is not merely retail panic selling but rather calculated portfolio reallocation by sophisticated investors. The software sector appears to be experiencing what could be characterized as institutional capitulation, with money managers actively reducing exposure to traditional software names in favor of semiconductor and AI hardware positions.

The growing investor preference for semiconductors over software reflects an evolving narrative about AI’s impact on the technology landscape. Recent analysis suggests that AI is fundamentally changing the value proposition of traditional software [2]. Investors are increasingly questioning whether enterprise software providers can maintain their business models as AI-native applications offer alternatives to legacy software solutions. This uncertainty has compressed software valuations while expanding semiconductor multiples, creating a self-reinforcing cycle of capital flows into chip-related investments.

While semiconductor performance has been exceptional, the rally is heavily concentrated in a few mega-cap AI beneficiaries. Nvidia (NVDA) has driven a disproportionate share of semiconductor sector gains, creating concentration risk that investors should monitor carefully [0]. The semiconductor rally’s reliance on a narrow group of AI chip leaders introduces vulnerability to any negative developments regarding AI demand, competitive dynamics, or regulatory scrutiny.

The semiconductor sector’s dependence on Taiwan represents a structural risk factor that underpins both the supply chain concerns and the investment thesis. The Taiwan-US $500B chip deal addresses some supply chain resilience concerns while simultaneously highlighting geopolitical dependencies [3]. Any escalation in Taiwan-related tensions could rapidly reverse semiconductor gains and trigger significant market volatility across technology sectors.

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The semiconductor rally’s dependence on a narrow group of mega-cap AI chip companies, primarily Nvidia, creates significant vulnerability [0]. Should AI demand slower than expected or competitive pressures intensify, the semiconductor sector could experience sharp corrections. Investors should be aware that semiconductor valuations have expanded considerably, with price-to-earnings multiples in some cases exceeding historical norms.

The stark valuation differential between semiconductors (expanding multiples) and software (compressing multiples) could reverse abruptly [0]. A shift in investor sentiment regarding AI hardware saturation or software AI integration success could trigger rapid sector rotation in the opposite direction.

Taiwan’s critical role in the semiconductor supply chain introduces inherent geopolitical risk [3]. Supply chain disruptions or escalation in cross-strait tensions could impact semiconductor production and create market-wide technology sector volatility.

Both sectors remain sensitive to Federal Reserve policy trajectories, though differentially. Higher-for-longer interest rate expectations continue to pressure growth stock valuations, with software names historically more sensitive to discount rate increases than semiconductor hardware companies.

The significant compression in software valuations has created potential entry points for investors with longer time horizons. Enterprise software platforms remain essential to corporate operations, and successful AI integration could reinvigorate growth trajectories for well-positioned providers.

The AI infrastructure buildout represents a multi-year demand driver for semiconductor companies [3]. Investors convinced of AI’s long-term transformative potential may view semiconductor strength as structural rather than cyclical.

Historically, extreme sector performance differentials often mean-revert over time. The 14.6 percentage point YTD gap between semiconductors and software could narrow through either semiconductor consolidation or software recovery, presenting tactical rebalancing opportunities.

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The January 29, 2026 market action confirmed and accelerated an ongoing sector rotation trend within technology investing. Software stocks suffered their worst single-day decline in ten months, while semiconductor equities demonstrated resilience despite broader market weakness.

• IGV (Software ETF) declined 2.35% on volume of 23.30 million shares (vs. ~9M average) [0]
• SOXX gained 0.04% and SMH rose 0.02%, demonstrating sector resilience [0]
• YTD performance gap: SOXX +7.08% versus IGV -7.53%, a 14.6 percentage point differential [0]
• IGV trading below all major moving averages; SOXX trading above all major moving averages [0]

• AI infrastructure capital expenditure continues to favor semiconductor demand [3]
• Taiwan-US $500B chip deal reinforces semiconductor supply chain investment [3]
• TSMC strong earnings guidance validates semiconductor demand environment [4]
• AI competition narrative pressures software sector valuations [2]

• SOXX maintains bullish technical posture above 20-day, 50-day, and 200-day moving averages [0]
• IGV exhibits bearish characteristics, trading below all major moving averages with negative momentum [0]
• Semiconductor sector RSI in moderate territory, not yet overbought on sector basis [0]

• Upcoming software company earnings reports and management guidance
• Federal Reserve policy communications and interest rate trajectory
• AI capital expenditure announcements from major technology companies
• Semiconductor inventory levels and potential oversupply concerns
• Geopolitical developments affecting Taiwan and semiconductor supply chains

The sector rotation from software to semiconductors reflects evolving investor expectations about AI’s impact on technology sector value creation. While semiconductor strength appears supported by structural AI infrastructure demand, software weakness may be overstating AI disruption risks in the near term. Market participants should monitor upcoming earnings reports and policy developments to assess whether this divergence narrows or widens further.