On Wednesday, software stocks experienced another downturn.
The iShares Enhanced Technology Software Sector ETF faced selling pressure, marking a 3% drop for the second consecutive quarter.
This decline followed a significant drop the day before, driven by investor anxiety over Anthropic’s new AI tool designed to assist legal professionals with various tasks. Initially, legal software stocks were hit hard, but the sell-off quickly impacted the broader sector.
Some significant underperformers in the software market on Wednesday included:
The tech-heavy Nasdaq fell by as much as 2% for the second day running, slipping deeper into the red.
As of 1:20 PM ET on Wednesday, the major indexes showed:
The sector officially entered a bear market last week, experiencing its most severe decline since the notorious “Emancipation Day” market crash, exacerbated by concerns regarding Microsoft’s results and rising capital investments in AI.
This decline echoes two prominent worries among investors. There’s the high valuation of tech stocks, and ongoing fears about an AI bubble that casts a shadow over the market.
Craig Johnson, managing director and chief market technician at Piper Sandler, pointed out the considerable uncertainty regarding the future business models of software companies.
Investors are weighing the potential existential threats posed to certain firms versus their ability to adapt to a shifting landscape.
Adam Parker, founder of Trivariate Research, remarked that investors are envisioning a future where, in three years, they might be using their desktops to generate code effortlessly, though they’re skeptical about eliminating software layers without impacting customer value.
“This reflects long-held concerns among market participants,” Michael Brown, senior research strategist at Pepperstone, commented regarding the significant drop on Tuesday.
However, this recent downturn seems to be a continuation of a year-long trend of weakness in the software sector.
For context, here are three graphs that depict the extent of this decline.
Software bear market
Last week, software stocks were officially labeled as entering a bear market. The iShares Expanded Technology Software Sector ETF is currently down 27% from its peak in September 2025.
Valuations are plummeting
Price-to-earnings ratios have also taken a hit for software companies, with the S&P Software Index’s P/E ratio dropping from around 85 times last summer to below 60 times.
Worst performing companies
Oracle, Varonis, CommVault, and Circle are among the sector’s weakest stocks, each down over 50% since their September peaks.
Wall Street’s perspective on software remains mixed following Tuesday’s dramatic loss.
Brown from Pepperstone noted that the overall technology outlook is “very solid,” citing robust U.S. earnings and optimistic economic growth expectations. According to FactSet, the S&P 500 index is projected to achieve 12% earnings growth in the fourth quarter, illustrating consistent double-digit growth over five consecutive quarters.
“I’m still in buy mode,” Brown added. “Overall, we’re seeing a market where the path of least resistance leans towards growth.”
On the other hand, Johnson from Piper Sandler suggested that many software stocks might still have room to decline further. He pointed to the Relative Strength Index, a technical metric used for forecasting short-term stock movements, expressing concern that most software stocks could drop another 10% to 20% before bottoming out.
“CRM, ServiceNow, Oracle, DataDog, Snow—all these aren’t reacting yet,” he said. “None of them have settled at an identifiable support level.”
Parker indicated that the software sector might find itself in a “guilty until proven innocent” situation, with investors likely to penalize companies until they can show stronger revenue growth.
“What the market conveys is that analyst expectations might be too optimistic,” he reflected on earnings. “Honestly, it feels like a falling knife that I’m hesitant to catch.”
