• We expect global economic growth to remain resilient and accelerate throughout this year, given that financial conditions are more accommodative. The Fed could still cut interest rates twice more in 2026.
• This should continue to feed back into greater corporate visibility, with earnings that continue to be revised upward with more potential in emerging markets.
• In this regard, the superior performance of ex-US markets this year is expected to extend into 2026, also leveraged by a weaker dollar, the AI investment cycle, and more attractive relative valuations.
• The dollar is expected to maintain its downward trend in 2026. 

S&P 500 Software Sector  

The software sector has suffered the largest non-recessionary decline, with a drawdown of -34% relative to the market, wiping out ~$2 trillion in market capitalization from its peak and reducing its weight in the S&P 500 from 12.0% to 8.4%.. This was largely due to growing concerns about the disruptive impact of new LLM capabilities and was further exacerbated by aggressive risk reduction and extreme technical positioning that has pushed sentiment to deeply pessimistic levels.  

According to market consensus estimates, the fundamentals of the software sector remain virtually intact. Expectations point to double-digit growth in both sales (+16.5%) and profits (+16.8%) in 2026, with ~10 bp of margin expansion.  

The results for Q4 2025 have been generally positive for software (36% have reported their results) and semiconductors (58%). In terms of outperforming and underperforming results, 100% of S&P 500 software companies and 91% of semiconductor companies that reported results exceeded earnings expectations. 

Fundamentals and Valuation. Given a combination of positive revisions to sales and earnings estimates for 2026 alongside recent underperformance in software, multiples have fallen by around -4x to 8.1x for the forward P/S and -11x to 23.6x for the forward P/E. These multiples are now at levels consistent with the lows of the post-Liberation Day market sell-off.  

Absolute valuations are at average levels for their history, while the software sector is trading at its lowest premium to the S&P 500 in more than 10 years.  

Given the extreme positioning, the overly bearish outlook on AI-driven software disruption, and solid fundamentals, we believe the balance of risks is increasingly skewed toward a rebound, especially in higher-quality software segments. Therefore, while further downside risk cannot be ruled out, we recommend that investors add exposure to higher-quality, AI-resilient software companies.  

From a technical standpoint, the software sector is trading at the bottom of the post-subprime crisis uptrend and from a fundamental perspective, the market consensus target price for the software sector is 49% above current levels.   

For more information, check out the following report.  

DISCLAIMER.

Investment Team Stockbroker