Software Sector Underperformance: Average Software Stock Now Below April 2025 Tariff Tantrum Lows

This analysis is based on the Seeking Alpha report published on February 6, 2026, which documented a striking divergence in sector performance since the April 8, 2025 market低谷 [1]. The “tariff tantrum” originated from sweeping tariff announcements that created extreme short-term volatility, with the NASDAQ falling 5.64% on April 8, 2025, followed by an 11.96% rebound on April 9—the largest single-day gain since 2008 [2][3]. Nearly ten months later, the market recovery has been highly uneven, with approximately 23% of Russell 1000 stocks still trading below their April 8 lows [0].

The software sector’s position is particularly concerning: while the broader Russell 1,000 has appreciated substantially, the average Software & Services stock has declined to levels below the initial tariff-related sell-off point. This represents not merely underperformance but an absolute loss in a period when most equities substantially recovered [0][1].

The magnitude of sector rotation since April 2025 reveals pronounced investor preferences for certain technology segments over others. Technology Hardware & Equipment has delivered exceptional returns of approximately 167%, while Semiconductors have generated gains near 125%—both dramatically outperforming the Russell 1,000 benchmark [0]. In stark contrast, Software & Services has posted negative returns, creating a performance gap exceeding 37 percentage points relative to the broader index.

This divergence reflects fundamental reassessment of growth technology exposures. The Russell 2000’s strong performance—up 3.44% year-to-date as of February 2026—contrasts sharply with the NASDAQ’s 4.01% decline, suggesting ongoing rotation toward value and small-cap exposures away from technology-centric growth [0]. The Dow Jones Industrial Average’s 1.67% year-to-date gain and the S&P 500’s 1.16% decline further illustrate the technology sector’s relative weakness.

Investor concern regarding artificial intelligence’s potential to disrupt traditional software business models has intensified substantially since late 2025. According to Bloomberg analysis, software stocks have been significantly impacted over fears that AI will fundamentally restructure the industry landscape [2]. The concerns center on multiple vectors: AI-native competitors potentially capturing market share from established vendors, enterprise customers reconsidering legacy software investments amid AI-powered alternatives, and uncertainty regarding which software business models will survive the AI transition.

The software industry’s historical competitive advantages—including network effects, switching costs, and integration moats—are being reevaluated in the context of AI-native architectures that may offer superior capabilities at lower cost points. This reassessment has triggered meaningful multiple compression for traditional software names, even when fundamental performance remains acceptable by traditional metrics.

Gartner, Inc. (IT) exemplifies the severe pressure facing software and IT services companies. The company’s recent earnings report—while beating consensus estimates—precipitated a single-session decline exceeding 21%, demonstrating that AI-related concerns are overwhelming traditional fundamental performance metrics [0]. The trajectory reveals sustained weakness across multiple timeframes:

The stock has declined 3.67% in a single trading session, 28.49% over five days, 37.89% over one month, and 35.86% year-to-date as of early February 2026 [0]. Most dramatically, the 71.55% year-over-year decline indicates fundamental restructuring of investor sentiment toward this previously stable growth name. Gartner’s experience suggests that software companies face a challenging environment where beat-and-raise dynamics may no longer generate positive returns if AI-related concerns persist.

Software companies face unique vulnerabilities in the tariff environment due to their global customer bases and international revenue exposure. While tariffs traditionally impact manufacturing and physical goods, the software sector’s reliance on enterprise customers worldwide—including multinational corporations with complex geographic footprints—creates indirect exposure through reduced enterprise technology spending and currency headwinds.

The April 2025 tariff announcements created immediate concern regarding software companies’ ability to maintain growth trajectories given potential slowdowns in international markets. Even as physical goods tariffs have fluctuated, the uncertainty surrounding trade policy has persisted, creating an unfavorable environment for companies dependent on global enterprise adoption cycles.

Several interconnected risk factors warrant monitoring in the software sector:

remains elevated, with structural threats to traditional software business models potentially accelerating as AI adoption curves steepen. Companies lacking clear AI integration strategies or competitive AI-native offerings face sustained competitive pressure.

presents medium-term risk, as institutional capital has demonstrated sustained preference for hardware and semiconductor exposures over software. This rotation may extend beyond a typical trading-range rotation into a more structural reallocation.

continues affecting software multiples as growth concerns intensify. The gap between software valuations and hardware/semiconductor valuations has widened substantially, potentially creating opportunities but also reflecting legitimate fundamental concerns.

remains relevant given ongoing tariff and trade policy uncertainty. Software companies with significant international revenue may face continued headwinds if trade tensions persist or escalate.

represents a high-impact risk, as new market participants with fundamentally different architectural approaches may capture meaningful market share from incumbents ill-positioned to respond.

Despite the challenging environment, several factors may influence the trajectory of software sector performance. Federal Reserve monetary policy remains a critical variable, as interest rate trajectories disproportionately impact growth stock valuations. The AI adoption curve’s trajectory will be essential to monitor, as the pace at which enterprises adopt AI-powered solutions versus maintaining legacy software investments will determine competitive dynamics.

Semiconductor demand strength has supported the hardware thesis, and continued demand persistence reinforces hardware sector momentum. Any resolution or clarification regarding tariff policies could reduce uncertainty premiums embedded in software valuations. Software earnings revisions, particularly forward guidance changes from major vendors, will serve as important sentiment indicators.

The Russell 2000’s momentum merits close attention, as small-cap strength may indicate broader economic confidence that could eventually support technology spending. Software companies demonstrating strong AI integration capabilities and defensible competitive positions may represent relative value opportunities if current rotation extends too far.

The software sector’s decline since the April 2025 tariff tantrum represents a significant sector rotation that extends beyond typical market cyclicality. The average software stock’s position below its pandemic-era crisis low—while the broader market has recovered strongly—highlights structural reassessment of growth technology exposures.

The convergence of tariff-related concerns and AI disruption fears has created a particularly challenging environment for traditional software business models. Unlike pure tariff sensitivity affecting physical goods manufacturers, software companies face dual pressures: direct AI competition threat and indirect exposure through enterprise spending constraints.

The performance gap between hardware/semiconductor stocks and software stocks reflects investor preference for AI infrastructure beneficiaries perceived as having clearer competitive positions and direct AI demand tailwinds. This allocation shift may prove structural rather than temporary if AI adoption accelerates faster than traditional software adaptation.

The Gartner case study demonstrates that even companies beating consensus earnings estimates face significant selling pressure when AI-related concerns dominate sentiment. This suggests the software sector’s challenges extend beyond traditional fundamental analysis into broader technological disruption concerns that may require different analytical frameworks.

Sector performance since April 8, 2025 reveals pronounced divergence: Technology Hardware & Equipment has appreciated approximately 167%, Semiconductors have gained roughly 125%, while the Russell 1,000 average has risen about 37%. The Software & Services group has declined to levels below the April 8, 2025 low, representing roughly 37 percentage points of underperformance versus the benchmark [0][1].

Current market conditions as of February 6, 2026 show the NASDAQ down 4.01% year-to-date (worst performer among major indices), the S&P 500 down 1.16% year-to-date, the Dow Jones Industrial up 1.67% year-to-date, and the Russell 2000 up 3.44% year-to-date (best performer) [0].

Gartner’s extreme underperformance—down 71.55% year-over-year and declining over 21% in a single session following earnings despite beating estimates—exemplifies the sector’s challenging dynamics [0]. The AI disruption thesis and tariff-related global revenue concerns remain the primary drivers of software sector weakness.

Approximately 23% of Russell 1000 stocks remain below their April 8, 2025 levels, indicating that the tariff tantrum’s impact persists for a meaningful subset of the market despite the broader recovery [0].