Software stocks rebound modestly
Despite the overall market downturn, S&P 500 software stocks showed some resilience, achieving their best weekly performance since May [https://economictimes.indiatimes.com/markets/us-stocks/news/us-stock-market-tech-turnaround-software-shares-recover-after-deep-selloff/articleshow/129497456.cms]. Does this signal a bottom for the software sector?
The S&P 500 Software Index experienced its best week since May, driven by strong earnings growth and significant share buybacks. This suggests a potential bottom after months of intense selling fueled by fears that AI could disrupt traditional software business models. Investors are reassessing whether the earlier pessimism regarding AI was overdone. Software companies within the S&P 500 are projected to deliver approximately 21% earnings growth this year, a rise from the roughly 17% forecast at the end of 2025. Around 93% of software companies in the index exceeded profit expectations in the fourth quarter, significantly higher than the broader market's 74% beat rate. This strong performance is helping to restore investor confidence. Despite the recent gains, software stocks remain relatively inexpensive. A Goldman Sachs software basket trades at around 22 times forward earnings, close to the multiple of the broader S&P 500 Index. Historically, software companies have commanded a much higher premium, averaging around 52 times earnings over the past decade. Individual stocks also reflect this valuation reset. Salesforce is trading at less than 15 times earnings, well below its decade-long average of around 46. Microsoft currently trades near 22 times earnings, also below its long-term average of roughly 27.
