Software Stocks Rebound 13% as Investors Defy AI Disruption Warning

Citrini Report Sparks 35% Sector Plunge

A February 23 report from Citrini Research forecasting an AI-driven apocalypse for software providers triggered a sharp selloff, culminating a painful downturn for the sector. The iShares Expanded Tech-Software Sector ETF (IGV), a key industry benchmark, fell 35% from its September high to its low on February 23. The report amplified investor fears that generative AI would enable companies to build their own software tools, rendering incumbent vendors obsolete. This bearish sentiment pushed short interest in the sector to a 17-year high by the end of the month, according to data from Deutsche Bank Securities.

Hedge Funds Reverse Course, Driving 13% Rebound

The market quickly pivoted, defying the bearish narrative. Since its bottom on February 23, the IGV software ETF has gained 13%, marking its strongest weekly performance in 11 months. This reversal was fueled by investors covering software shorts and unwinding crowded positions in semiconductor companies. A Goldman Sachs basket tracking software versus semiconductor firms rose approximately 9% in March, reflecting the rapid shift in sentiment. Options market data confirms the change, showing a surge in demand for bullish software exposure as positioning moved from deeply oversold levels to active re-engagement.

Valuations and Buybacks Signal Renewed Confidence

Underpinning the recovery are compelling fundamentals and decisive corporate action. A Goldman Sachs software basket now trades at 22 times forward earnings—a significant discount to its 10-year average of 52. Individual stocks like Salesforce are priced at less than 15 times forward earnings, compared to their historical average of 46. This valuation gap is reinforced by strong performance, as 93% of S&P 500 software companies beat fourth-quarter profit estimates, and the sector is projected to deliver 21% earnings growth in 2026.

Companies are leveraging their beaten-down stock prices to return capital to shareholders. Salesforce announced it is increasing its share repurchase authorization to $50 billion. Other software makers, including Wix.com and Intuit Inc., have also committed to aggressive buybacks, signaling management's belief that market fears are exaggerated.

This is not our first SaaSpocalypse.

— Marc Benioff, CEO of Salesforce.