The long-term money continues to hate software stocks, even at far cheaper valuations. That says a lot.
By the numbers: Mutual funds have entered the second quarter carrying their lowest exposure to software stocks since at least 2012, according to new research from Goldman Sachs.
Excluding the megacaps, the mutual fund tilt in semiconductors versus software stocks is the largest since 2012. Similarly, hedge funds entered the quarter with software registering its smallest weight in the hedge fund long portfolio since 2019, while the weight of semis is at a record high.
Within semis, hedge funds have added to positions in Lam Research (LRCX), Applied Materials (AMAT), and ASML (ASML), while mutual funds have added to Intel (INTC) and SiTime (SITM).
Why software stocks remain out of favor: The S&P Software & Services Index (XSW) is down 12% year to date. Names like Salesforce (CRM), Adobe (ADBE), and ServiceNow (NOW) have each shed 25% to 30% of their value — a gut-punch for investors who piled into these former Wall Street darlings in recent years.
The concern driving the sell-off is straightforward: Wall Street is terrified that artificial intelligence is on the verge of making traditional enterprise software obsolete. When fear like this grips the market, it doesn’t discriminate — software stocks of all kinds are being sold indiscriminately.
Making matters worse, revenue growth for software firms genuinely slowed through 2025, as enterprise clients began delaying purchases, essentially taking a wait-and-see approach to figure out whether AI tools could do the job their expensive SaaS subscriptions once handled.
The valuation hangover is real too: Between 2016 and 2025, the S&P Software & Service Index soared from under 4,000 to over 17,000, which means even after this year’s wipeout, these stocks still have room to reprice further if AI disruption fears deepen.
Keep an eye on Salesforce earnings on Wednesday to get a sense of AI disruption fears.
The bottom line: The software sector has a lot to prove over the next few quarters, namely, that once formidable businesses could still perform in the age of AI. A little more humility about the impact of AI, rather than outlandish proclamations from software execs, may be welcomed by investors too.
On this point, one of the software industry’s biggest hype men recently made a stunning claim that’s almost hard to comprehend.
“I explained very clearly to our company that when this thing breaks loose, it will break loose and we will be a trillion-dollar company,” ServiceNow CEO Bill McDermott said in a Fortune interview this month. “It’s just a question of which day it breaks loose. It’s not a question of whether it will.”
ServiceNow’s market cap stands at $105 billion.
Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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