Software stocks face a growing reckoning as Wall Street reconsiders how artificial intelligence affects the sector.
Goldman Sachs is the latest to offer a reality check, suggesting that the software reckoning may not be over yet, even as short-term sales seem overstated and some investors leave cheap buyincluding Bank of America.
In a research note shared with me, Goldman Sachs analysts said Wall Street investors are shifting from the limitless opportunities of AI to a “show me the money” mentality.
It’s a big and potentially grim change for the software industry and shareholders.
Where the proverbial rubber will hit the road will be in what happens after revenue and profit growth; Software stocks in particular may see a major rerating of revenue and earnings estimates as they find themselves in the AI agent crosshairs.
Having had a front-row seat to the boom and bust of the Internet and paying considerable tuition in the process, I’ve seen changes like this before. When markets sour on highly valued stocks, the reset can be long and painful. But it doesn’t happen in a straight line.
Here’s why Goldman Sachs says software stocks are under pressure and why Bank of America thinks investors should consider four software stocks that are oversold.
Software stocks have rallied for years due to the growing adoption of hybrid and cloud networks, which required solutions that could operate in silos and a shift toward subscription models that provided repeat predictability of high-margin revenue.
The rise of AI is challenging the notion that businesses and governments need to rely on many specialized software providers.
Agentic AI is reshaping Wall Street’s outlook for the software industry. ·TO
Agent AI applications are evolving rapidly and many argue that they will eventually replace many programmers, allowing companies more flexibility to create and manage their own software solutions internally.
The “SaaS Apocalypse”: Software as a Service (SaaS) historically relies on human interaction with interfaces (UI). If AI agents perform tasks through APIs or background processes, the benefits of expensive front-end software subscriptions disappear.
Commoditization of features: AI agents can “bring together” simple tools to solve complex problems, eroding the high-value “moats” of specialized software companies.
Switch to “Results as a service”: If an agent completes a task in seconds that previously took humans hours, companies can no longer justify charging based on “user access” and “per seat” licensing.
Goldman Sachs sees these risks as a potential existential crisis that could make Wall Street reconsider paying for its own software stocks.
“Upcoming catalysts for the latest leg of the sell-off include Anthropic’s launch of add-ons for its Claude Cowork tool, as well as the launch of Google’s Genie 3 model,” Goldman Sachs analysts wrote in a note shared with TheStreet.
“In recent conversations, investors have focused on both the incremental downside risk to software earnings growth and the existential risk to the industry.”
Two of the most common ways to value software stocks are the price-to-sales ratio and the price-to-earnings ratio. Both have retreated substantially during the sell-off as revenue and earnings expectations have remained largely unchanged.
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“The software’s price-to-sales ratio has decreased from 9x in September 2025 to 6x currently,” Goldman Sachs wrote. “Despite this decline, the industry is trading at a 260% premium to the equally weighted S&P 500, in line with the historical average.”
The price-to-sales ratio does not suggest that the software is necessarily cheap. However, P/E ratios can indicate opportunities, assuming Wall Street consensus estimates don’t miss the mark.
“The forward P/E multiple for software has declined from 35x at the end of 2025 to 20x currently, representing the lowest absolute level since 2014 and the smallest premium over the average S&P 500 stock since 2010,” the analysts said.
In 20 times future earningsThe software sector is at its cheapest level in more than a decade.
According to Goldman Sachs, the current forward P/E multiple is more in line with companies’ growth. 5% to 10% annually, while the industry’s P/E multiple of 36 last September suggested 15% to 20% growth.
This suggests a major disconnect for investors. Either sales and earnings estimates are going to fall substantially, or these stocks are underestimating potential growth.
The pullback has been swift and relentless, and in my experience, stocks don’t go up or down in a straight line for very long.
It’s likely that regardless of the ultimate outcome of AI’s threat to industry and IT budgets, investors will begin to dive into top software stocks that may have been wrongly caught up in the rout, especially since many institutional managers may have already exited.
“Our analysts also see opportunities in some of the stocks caught up in the recent sell-off,” Goldman Sachs wrote. “From a positioning perspective, both hedge funds and mutual funds have recently reduced their exposure to the software.…mutual funds entered 2026 underweight the industry.”
“We expect investors to look for the proverbial babies thrown out with the bathwater,” Goldman Sachs said.
Which stocks could be in line to see a rebound first?
bank of america He mentioned four stocks that he believes will recover:
Snowflake (SNOW): “We believe the business is attractively positioned to gain long-term share of the AI data cloud opportunity. Snowflake is helping enterprises solve a critical problem: making sense of mountains of data.”
MongoDB (MDB): “We think MongoDB’s JSON document database is special… and is setting the business up nicely as a long-term share winner in new AI workloads and as enterprises modernize legacy ones.”
data dog (DDOG): “What’s being overlooked is that observability is mission critical. Even OpenAI, one of the craziest growth stories of the last few decades, spent over a hundred million on Datadog before even thinking about moving some of that work in-house.”
JFrog (FROG): “Even as adjacent vendors in the software development ecosystem become louder with new competitive products, we believe JFrog is the leader and has little risk of being displaced in the near term.” Source: BofA Global Research report.
Todd Campbell owns shares in iShares Expanded Tech-Software Sector ETF (IGV) and Snowflake (SNOW).
Related: 40-Year-Old Wall Street Pro Drops Tech Stock Rebound Verdict
This story was originally published by TheStreet on February 7, 2026, where it first appeared in the Investments section. Add TheStreet as a preferred source by clicking here.
