Software Stocks Plunge 15% in Early 2026, Marking Worst Start Since 2022
Tech's traditional darlings are taking a beating. The software sector just logged its worst opening act in four years—down a sharp 15% to kick off 2026.
What's Behind the Slide?
Forget the usual excuses about interest rates or macro wobbles. This feels different. The sell-off is broad, deep, and indiscriminate. Growth names that were untouchable just months ago are getting hammered. It's a classic rotation—but into what? The money has to go somewhere.
A Cynical Take on the Carnage
Wall Street analysts are scrambling to update their models, likely shifting price targets just in time to say they 'saw it coming.' Meanwhile, the usual buy-the-dip chorus is sounding a bit strained. Maybe the market's finally questioning whether 'software eating the world' includes its own profitability.
The Bigger Picture
This isn't just a bad month. It's a signal. When legacy tech stumbles, capital gets restless. It hunts for the next paradigm, the next asymmetric bet. History shows that periods of stress in traditional sectors often accelerate adoption of alternative assets and models. The smart money isn't just looking for a bounce—it's looking for the exit and the next entry point.
New AI tool sparks investor concerns
Morgan Stanley’s tracking of software-as-a-service companies shows the group has fallen 15% since January began, coming on the heels of an 11% decline in 2025. This marks the sector’s most difficult year opening since 2022, based on Bloomberg’s compiled figures.
Anthropic unveiled its Claude Cowork service on Jan. 12 as a “research preview.” The tool can generate spreadsheets from screenshot images or compile draft reports from scattered notes, the company says. Developers built it rapidly, relying heavily on AI technology.
Though the product remains unproven, it exemplifies exactly the kind of competitive threat that has been spooking investors. Jordan Klein, who specializes in technology at Mizuho Securities, notes these fears are reinforcing pessimistic market positions that appear increasingly dug in.
“Many buysiders see no reasons to own software no matter how cheap or beaten down the stocks get,” Klein stated in a Jan. 14 client note. “They assume zero catalysts for a re-rate exist right now,” he added, referring to prospects for improved valuation ratios.
The recent selling wave has widened an already substantial performance divide between software firms and other technology sectors. Concerns about rivalry from emerging AI services are overshadowing qualities like substantial profit margins and dependable recurring income that previously made these companies appealing to market professionals.
The Nasdaq 100 Index is hovering NEAR all-time peaks, yet companies such as ServiceNow Inc. are changing hands at their lowest prices in years. A key issue is that most software producers haven’t demonstrated meaningful progress with their own AI products. Salesforce has promoted uptake of its Agentforce offering, though it hasn’t substantially impacted revenue figures. Adobe has added generative AI capabilities to its photo and video editing programs, but chose not to refresh certain AI-related metrics in its December quarterly earnings announcement.
Established players possess strengths in distribution channels and data access, but they must demonstrate faster growth for stock prices to recover, Wong said. That outcome doesn’t seem probable in the near term.
Chipmakers surge while software lags
Profit growth for software and services firms in the S&P 500 is forecast to decelerate to 14% in 2026, down from approximately 19% growth estimated for 2025, according to Bloomberg Intelligence data. The underlying business outlook appears brighter in other technology segments.
Consider semiconductor manufacturers. Firms like Nvidia Corp. have clearer revenue growth prospects thanks to pledges from technology behemoths, including Microsoft Corp., Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc., to invest heavily in AI infrastructure this year. Semiconductor-linked stocks are anticipated to achieve profit expansion of nearly 45% in 2025, then jump to 59% in 2026, Bloomberg Intelligence reports.
“The reason chipmakers are outperforming is that their fundamentals are getting a lot better and there’s more certainty about their growth given their customers,” said Jonathan Cofsky, who manages portfolios at Janus Henderson Investors. “At the same time, there’s a lot less certainty about how AI will change the software ecosystem.”
Software company valuations continue sliding lower. The Morgan Stanley basket trades at 18 times projected earnings for the coming 12 months—a record low—and far beneath a decade-long average exceeding 55 times.
“The reason software companies had lofty multiples is because they were subscription based, with recurring revenue that you could extrapolate into the future almost forever,” said Osterweis Capital’s Wong. “It is hard to know what multiple they should be trading at if they’re going up against AI agents that are running 24/7 and have the ability to complete tasks, with big projects getting done in a day.”
These reduced valuations, though, are among various elements prompting some Wall Street analysts to express Optimism about a sector recovery.
Barclays predicts software stocks will “finally catch a break” in 2026 as client spending stays steady and valuations remain attractive. Goldman Sachs expects growing AI adoption will increasingly benefit software companies by enlarging their total addressable market. D.A. Davidson contends that because narratives have overwhelmed fundamentals for numerous software firms, 2026 presents a favorable moment to selectively re-enter the group.
“We’re not in a position where we can say the turn is here, since existential fears about AI will be here for a while, but the sector does look more interesting,” said Chris Maxey, managing director and chief market strategist at Wealthspire, which oversees $580 billion in assets. “The group isn’t a screaming buy, but we’re getting closer to that.”
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