Long-term money still hates software stocks, even at much cheaper valuations. That says a lot.
In numbers: Mutual funds have entered the second quarter with their lowest exposure to software stocks since at least 2012, according to new research from Goldman Sachs.
Excluding megacaps, mutual funds’ tilt between semiconductor and software stocks is the largest since 2012. Similarly, hedge funds began the quarter with software posting its lowest weight in hedge funds’ long portfolio since 2019, while semis’ weight is at a record level.
Within the semi-finals, hedge funds have increased their positions in Lam Research (LRCX), Applied Materials (AMAT) and ASML (ASML), while mutual funds have increased their positions in Intel (INTC) and SiTime (SITM).
Why software stocks remain out of favor: The S&P Software & Services Index (XSW) is down 12% so far this year. Names like Salesforce (CRM), Adobe (ADBE) and ServiceNow (NOW) have each lost between 25% and 30% of their value, a blow to investors who piled into these former Wall Street favorites in recent years.
The concern driving the sell-off is simple: Wall Street is terrified that artificial intelligence is about to make traditional business software obsolete. When fear like this takes over the market, it does not discriminate: software stocks of all kinds are sold indiscriminately.
To make matters worse, software companies’ revenue growth actually slowed through 2025, as enterprise customers began delaying purchases, essentially taking a wait-and-see approach to determine whether AI tools could do the job previously done by their expensive SaaS subscriptions.
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, meaning that even after this year’s drop, these stocks still have room to reprice if fears of AI disruption deepen.
Watch Salesforce’s earnings on Wednesday for a sense of fears about AI disruption.
The final result: The software industry has a lot to prove in the coming quarters, namely that once-formidable companies can still perform in the age of AI. Investors may also welcome a little more humility about the impact of AI, rather than extravagant proclamations from software executives.
On this point, one of the most exaggerated men in the software industry recently made a surprising claim that is almost difficult to understand.
“I explained very clearly to our company that when this thing hits the fan, it hits the fan and we’re going to be a trillion-dollar company,” ServiceNow CEO Bill McDermott said in an interview with Fortune this month. “It’s just a question of what day it will break out. It’s not a question of if it will.”