Karla Barker 
Software Sector Faces Rough Start to 2026
Software company shares are having a really tough beginning to 2026, which is disappointing for investors who hoped this year might bring some relief. The sector has fallen 15% since January started, following an 11% decline in 2025. This marks the worst opening to a year since 2022, according to Bloomberg’s data.
Major players like Intuit saw their stock plunge 16% over the past week, which is their steepest decline since 2022. Adobe and Salesforce each dropped over 11% during the same period. It’s a pretty significant sell-off that’s caught many by surprise.
AI Competition Sparks Investor Worries
What seems to be driving this latest downturn is renewed concern about artificial intelligence competition. Earlier this month, tech startup Anthropic unveiled its Claude Cowork service as a research preview. The tool can generate spreadsheets from screenshots or compile draft reports from scattered notes.
Though the product isn’t fully proven yet, it represents exactly the kind of competitive threat that’s been worrying investors. Jordan Klein from Mizuho Securities notes that these fears are reinforcing pessimistic market positions that appear pretty entrenched.
“Many buysiders see no reasons to own software no matter how cheap or beaten down the stocks get,” Klein stated in a client note. “They assume zero catalysts for a re-rate exist right now.”
Valuations Hit Record Lows
The recent selling has widened an already substantial performance gap between software firms and other technology sectors. Concerns about AI competition are overshadowing qualities like strong profit margins and dependable recurring revenue that previously made these companies attractive.
Here’s something interesting: the Nasdaq 100 Index is near all-time highs, yet companies like ServiceNow are trading at their lowest prices in years. A key issue is that most software producers haven’t shown meaningful progress with their own AI products.
Salesforce has promoted its Agentforce offering, but it hasn’t significantly impacted revenue. Adobe added generative AI capabilities to its editing programs, but chose not to refresh certain AI-related metrics in its December earnings announcement.
Fundamental Challenges and Some Optimism
Profit growth for software and services firms in the S&P 500 is forecast to slow to 14% in 2026, down from about 19% growth estimated for 2025. This contrasts with other technology segments where the outlook appears brighter.
Semiconductor manufacturers like Nvidia have clearer revenue growth prospects thanks to commitments from tech giants like Microsoft, Amazon, Alphabet, and Meta to invest heavily in AI infrastructure this year. Semiconductor stocks are expected to achieve profit growth of nearly 45% in 2025, then jump to 59% in 2026.
“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 of 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 below a decade-long average exceeding 55 times.
Despite these challenges, some Wall Street analysts see reasons for optimism. 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.
“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 of Wealthspire. “The group isn’t a screaming buy, but we’re getting closer to that.”
It’s a difficult moment for software investors, but perhaps the extreme pessimism has created some opportunities. The question is whether the sector can adapt quickly enough to the AI-driven changes reshaping the technology landscape.