MW Software stocks sink, extending their historic underperformance. What comes next?
By Hannah Pedone
'Momentum is a powerful force in capital markets,' an analyst says, and right now it's not on the side of software stocks
Salesforce's stock is having its worst day in almost three years.
The selloff in software stocks is compounding on Tuesday, reinforcing the software sector's historic underperformance relative to the chip sector.
Jessica Rabe, the co-founder of DataTrek Research, recently looked at the 100-day trailing returns of the VanEck Semiconductor ETF SMH and the iShares Expanded Tech-Software Sector ETF IGV, two exchange-traded funds viewed as proxies for their respective industries. She noted that chips are now outperforming software by roughly 5 standard deviations, which she called an "unprecedented" divergence.
And software stocks are taking a continued beating on Tuesday, with the iShares Expanded-Tech Software Sector ETF off 5.7% and coursing toward its worst daily drop since a 6.2% fall on April 4, 2025. The pressure reflects renewed concerns about artificial-intelligence disruption and enterprise appetites for traditional software offerings.
Salesforce shares (CRM), for instance, are down 8.1% and on track for their worst day since May 4, 2023, according to Dow Jones Market Data. IBM's stock $(IBM)$ is off 9.4% and tracking toward its biggest one-day fall since Oct. 21, 2021, when it lost 9.6%.
While chip stocks are also dropping on Tuesday, software stocks are falling harder. The question now is just how long the software sector can remain under pressure, especially given how notably it's been lagging lately.
See also: These software stocks could rise as much as 75%. But is now the time to buy?
Rabe's chart, as replicated by Dow Jones Market Data, shows that chip stocks beat software stocks in 2024 by a significant magnitude - though not quite as large as the current one. That triggered a major reversal, with chip stocks going on to lag software stocks by 16 percentage points over the following 100 trading days.
Does that mean software is about to roar back? Not quite, according to Rabe. She's not ready to call a software rebound, pointing to the unprecedented challenges facing the sector's growth.
"History says software is very oversold relative to chips, but we think its unprecedented underperformance suggests that its underlying fundamentals face structural headwinds that don't necessarily support an immediate 'reversion to the mean' trade," she said in a note.
Read: Buy Microsoft's stock while it's down? First ask yourself this question.
Heightened demand for generative-AI infrastructure is driving investors' preference for chips over software, compounded by the fact that software companies' revenue streams are under threat as AI tools advance, Rabe noted.
"Investors used to favor software companies because of their recurring subscription revenue streams," she wrote. "Now, there are more options, making future revenue less secure and giving fewer reasons for customers to pay for upgrades or add-ons to existing services."
If you're an investor seeking a contrarian trade, software may still be worth a look, according to Rabe, but tailwinds for the chips sector are hard to ignore.
"Momentum is a powerful force in capital markets," she said, adding that semiconductors "have both the price momentum and fundamentals behind them."
-Hannah Pedone
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(END) Dow Jones Newswires
February 03, 2026 14:43 ET (19:43 GMT)
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