Software Stocks Historic Underperformance: Market Analysis of Sector-Wide Selloff in Early 2026

This analysis is based on the MarketWatch report [1] published on February 3, 2026, which examines the dramatic underperformance of software stocks extending into early 2026. The article captures a pivotal moment in market dynamics where the software sector, historically a market leader, is experiencing a sustained and severe correction. According to market analysts quoted in the report, “Momentum is a powerful force in capital markets,” and currently, this force is working decisively against software equities [1].

The timing of this underperformance is particularly noteworthy, occurring just after several major software companies reported quarterly earnings that failed to meet elevated investor expectations. The combination of high valuations, growth deceleration concerns, and uncertainty surrounding AI’s impact on traditional software business models has created a confluence of negative factors weighing heavily on the sector.

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The Technology sector’s 3.29% decline on February 3, 2026, represented the worst performance among all sectors that day [0], signaling that software-related weakness was spreading beyond individual company concerns to become a sector-wide phenomenon. The NASDAQ Composite’s 2.29% decline to 23,124.94 reflected the index’s heavy weighting in technology and software stocks, while the broader S&P 500 fell 1.31% to 6,894.04 [0]. Notably, the Dow Jones Industrial Average showed relative resilience, declining only 0.48%, which highlights the concentrated nature of the weakness in growth-oriented technology names.

The iShares Expanded Tech-Software Sector ETF (IGV), which tracks the software sector, experienced a devastating 16% decline during January 2026 alone [1], marking one of the worst monthly performances for the sector in recent memory. This sustained selling pressure has erased substantial value from software-focused portfolios and has fundamentally shifted market sentiment toward the formerly high-flying sector.

Individual company losses have been even more pronounced, with Microsoft dropping approximately 10% on January 29, 2026, following its earnings report [2], ServiceNow declining over 50% from its late-2024 peak [1], SAP falling more than 15% after reporting a cloud-backlog miss [2], and Intuit experiencing the steepest decline in the S&P 500 for the year, down approximately 25% [2]. These widespread declines across multiple software sub-sectors suggest that the underperformance is结构性 (structural) rather than company-specific.

Current market data reveals the extent of the damage across major software names [0]:

Company	Current Price	Daily Change	52-Week Context	Valuation (P/E)
Microsoft (MSFT)	$409.52	-3.27%	~26% below highs	25.66
ServiceNow (NOW)	$109.04	-7.59%	~48% below highs	65.29
Salesforce (CRM)	$195.88	-7.08%	~44% below highs	26.15

The valuation compression has been significant even for quality names like Microsoft, which now trades at 25.66x earnings—a meaningful discount to historical levels despite maintaining solid fundamentals including 38% constant-currency growth in Azure cloud revenue [2]. ServiceNow’s elevated 65.29x P/E ratio remains relatively high compared to the broader market, suggesting that even after substantial price declines, some software valuations remain frothy relative to slower-growth alternatives.

One of the most striking features of the current market environment is the extreme divergence between software and semiconductor stocks [2]. While software names have collapsed, semiconductor equities have continued to generate strong returns, with NVIDIA (NVDA) showing a remarkable 106.5% year-over-year gain despite its own 3.66% decline on February 3 [0]. This sector rotation from application-layer AI (software) to infrastructure-layer AI (semiconductors) represents a meaningful shift in how investors are positioning for the artificial intelligence boom.

The top S&P 500 performers year-to-date have been dominated by semiconductor-related companies including Sandisk, Western Digital, Seagate, Micron, Lam Research, KLA, Applied Materials, and Intel [2]. Meanwhile, the bottom performers have been predominantly software names including Intuit, AppLovin, ServiceNow, Salesforce, and Workday. This bifurcation suggests that investors believe semiconductor hardware companies are better positioned to capitalize on AI infrastructure spending, while software companies face uncertainty about whether AI will ultimately complement or disrupt their traditional business models.

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The software sector’s current difficulties stem from multiple structural factors that have converged to create a challenging environment for software equities. First, the three-year pandemic-era boom in software spending left valuations at elevated levels that became increasingly difficult to justify as growth rates normalized. The “frothier” multiples that prevailed throughout 2023-2024 have undergone significant compression as investors reassess the sustainability of software growth trajectories [1].

Second, the emergence of generative AI has created fundamental uncertainty about traditional software business models [1][2]. Enterprise customers are increasingly questioning whether they should continue investing in legacy software solutions that may be disrupted by AI-powered alternatives, whether in-house developed or provided by new market entrants. This “AI disruption fear” has introduced a risk factor that was largely absent from software investment thesis discussions just two years ago.

Third, cloud growth rates—while still producing impressive absolute numbers—have shown deceleration that concerns investors focused on the next leg of growth. Microsoft’s Azure cloud maintained 38% constant-currency growth, but this acceleration wasn’t as strong as the previous quarter, which disappointed investors who had priced in continued momentum [2]. This dynamic reflects the challenge software companies face in maintaining growth rates as they scale to larger revenue bases.

The technical and momentum aspects of this selloff cannot be understated. Analyst commentary has noted that selling pressure has been conviction-driven rather than speculative, with elevated trading volumes in software names indicating that market participants are making decisive allocation shifts away from the sector [2]. The Mizuho Trading Desk analyst explicitly cautioned that “maybe it can actually get a lot worse” [2], suggesting that technical momentum remains firmly negative and could extend the current decline.

The psychological shift in market perception has been equally significant. Where software stocks were once described as “eating the world” in reference to their dominant position in enterprise technology budgets, the sector is now being characterized in more cannibalistic terms [1], with investors worried about internal AI development potentially displacing vendor software purchases and AI-native startups threatening incumbent market positions.

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Several elevated risk indicators warrant close monitoring from market participants. The momentum risk remains substantial, with analyst commentary suggesting that conditions could deteriorate further before stabilizing [2]. Historical patterns indicate that momentum-driven selloffs often overshoot fundamental fair value before finding a bottom, which implies potential additional downside even from current depressed levels.

Valuation reset risk persists despite significant price declines, particularly for high-growth software names. ServiceNow’s 65.29x P/E ratio [0] remains elevated relative to the broader market and historical software multiples, suggesting that multiple compression may not yet be complete. Even Microsoft at 25.66x represents a discount to historical levels, but the question remains whether this valuation adequately reflects the growth headwinds facing the sector.

Growth sustainability risk has emerged as a central concern, with cloud growth deceleration potentially signaling broader enterprise spending weakness. If major software vendors cannot maintain growth rates that justify their valuations, further multiple compression would likely follow. The AI displacement risk remains difficult to quantify but could have significant implications for traditional software business models if enterprise customers shift toward AI-powered solutions.

Despite the challenging environment, several factors could serve as catalysts for stabilization or recovery. Strong earnings reports from major software vendors could shift sentiment, particularly if cloud growth reaccelerates or AI monetization initiatives demonstrate tangible revenue impact [2]. The Q4 2025 earnings season represents an important inflection point that could either confirm or contradict the current bearish narrative.

From a valuation perspective, significant price declines have created more attractive entry points for long-term investors willing to tolerate near-term volatility. Microsoft at 25.66x earnings [0] represents a meaningful discount to historical levels for a company maintaining solid cloud growth, while the 40-50% declines from peaks for many software names may represent overcorrection if AI ultimately benefits established software vendors rather than displacing them entirely.

The eventual resolution of AI-related uncertainty could also serve as a positive catalyst. As the technology landscape clarifies and the actual impact of AI on software demand becomes more visible, investors may be willing to reprice软件 stocks more favorably. The current uncertainty premium embedded in software valuations could reverse if AI proves complementary to rather than disruptive of traditional software business models.

The current window of software underperformance appears to be in an acute phase, with January 2026’s 16% sector decline [1] representing accelerated selling pressure. Near-term catalysts including upcoming earnings reports and economic data could trigger continued volatility. Investors considering positions in the sector should be prepared for elevated short-term volatility while maintaining longer-term perspective on fundamental business quality.

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The software sector’s historic underperformance in early 2026 reflects a convergence of valuation compression, growth deceleration concerns, and AI-related uncertainty. Major software stocks have declined 40-50% from their 2024 peaks, with the Technology sector posting its worst daily performance since late 2025 on February 3, 2026 [0]. The IGV software ETF’s 16% January decline [1] signals sustained institutional selling pressure away from the sector.

The stark divergence from semiconductor stocks suggests a market rotation from application-layer to infrastructure-layer AI exposure [2]. While software valuations have compressed significantly, some names remain elevated relative to growth rates, and analyst commentary indicates momentum could remain negative in the near term [2]. Key factors to monitor include upcoming earnings for growth sustainability signals, cloud growth rate trends, AI monetization progress, and enterprise IT spending intentions for 2026.

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The risk factors identified above—including valuation reset risk, growth sustainability concerns, AI disruption uncertainty, and negative technical momentum—represent considerations for market participants rather than specific investment recommendations. Past performance is not indicative of future results, and market conditions may evolve rapidly based on new information, earnings reports, or macroeconomic developments.