Software’s Horror Show: Short-Term Bounce Possible

With input from Market Watch, the Financial Times, and Reuters.

Software stocks might get a little relief soon, but the structural headaches that sparked the sell-off haven’t gone away. Citi’s team says don’t get too comfortable — a bounce could be temporary while deeper threats (AI disruption, squeezed margins, and stretched expectations) hang over the sector.

The software & services corner of the market has taken a beating — down roughly 27% since late October, per reporting in the Financial Times’s Unhedged newsletter. Valuations are cheaper relative to the broader market, but still not bargain-basement: the group trades at a bit above 22 times expected earnings, a multiple that looked normal only a few years ago.

Analysts say we’re actually seeing two overlapping corrections. The first began in late October, when market leadership shifted away from growth tech. The second kicked off after an earnings cycle in late January, when results from big names — including Microsoft — disappointed and acted as a catalyst for fresh selling.

Some companies escaped the earliest pain only to be crushed this month (think EPAM and Cognizant). Others went down hard earlier and barely blinked recently (like Oracle). A few names — such as Intuit, Tyler Technologies, Gartner and AppLovin — have been dragged down in both waves, partly because many of them ran up big gains from 2022 through early 2025 and were vulnerable when sentiment shifted.

Scott Chronert’s team at Citigroup points out that margins in software had become unusually fat — and investors had been pricing in the idea that those rich profits would keep rolling forever. That’s a risky bet if AI tools start automating the “cognitive” work that many software businesses sell, or if competition forces pricing and margins to compress.

Not everyone agrees doom is inevitable. J.P. Morgan strategists, led by Dubravko Lakos-Bujas, argue the market is pricing in extreme disruption scenarios and that high-quality names could bounce in the next few months. Morgan Stanley has also flagged sentiment-driven valuation gaps that savvy investors might exploit.

Short-term relief? Maybe. Long-term calm? Don’t bet on it. The sector faces a tricky two-front fight: near-term sentiment swings and a deeper, harder-to-model threat from AI and margin reversion. If you trade software, expect volatility — and plan for a world where some legacy players have to reinvent themselves or face serious competition from increasingly capable automation.

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