Microsoft Cheaper Than IBM: Overshoot or Repricing?

Software has been one of the weakest corners of US equities so far in 2026. The S&P 500 Software and Services index is over 15% lower year to date, and the drawdown accelerated after $Microsoft(MSFT)$   's earnings in late January helped turn a slow bleed into a sector wide de-risk.  

In the seven sessions through last Thursday, the index shed roughly $1T in market value, a move that quickly earned the nickname "softwaremageddon." The bounce only showed up late: the software index rose 2.4% on Friday after falling more than 17% over the prior seven sessions, then added another 2.9% on Monday. Even after the rebound, it was still roughly 13% below its level before the late January exodus, which tells you the debate is far from settled.

Why software is selling off

$Microsoft (MSFT.US)$ 's recent drawdown has been read as a company story, but the tape looks more like a sector reset. Earnings gave investors two things at once: solid cloud growth and a reminder that the AI transition changes the rules of software pricing.

Azure revenue still rose 39% YoY, and Microsoft Cloud revenue reached $51.5B. The stock reaction came from a higher bar plus a new anxiety: AI spending is climbing fast, while investors want clearer proof that software revenue and margins can keep compounding through the shift.

That fear is not limited to Microsoft. The recent software slide has been framed as a market wide reaction to faster advancing AI tools that could reshape demand for traditional software and subscriptions, with sector selling intense enough to wipe out about $1T in market value since late January. 

The valuation chart that changed the conversation

The Bloomberg blended forward 12 month P/E chart in the image tells a story that feels backwards for the last decade. $Microsoft (MSFT.US)$ screens at roughly 23x, while $IBM(IBM)$   sits around 24x, making Microsoft cheaper than IBM for the first time since around 2013 on this metric.

Whether the exact decimal is 23.1 or 23.4 matters less than the signal. The market is no longer paying a premium multiple for "high quality software exposure" by default. It is asking what software even means in an AI heavy budget.

Two ways to read the Microsoft led software washout

The bull view: valuation is already doing a lot of the work. 

A Microsoft multiple that dips below IBM's suggests the market is discounting slower growth, weaker margins, and reduced capital return. 

Bulls will argue that the core franchises, and many best in class software platforms, stay sticky: enterprise workflows still run on Office, security and compliance are not optional, and cloud migration remains a long duration trend that keeps pulling spend toward platforms with distribution and trust. 

Under that lens, the setup looks like a sentiment overshoot where quality software gets repriced first, then sorted later.

The bear view: AI can pressure software economics even when software survives. 

Gartner expects total software spending in 2026 to remain around $1.4T, which sounds huge until the mix shifts toward models, inference, agents, and infrastructure that do not always flow through the same software vendors. 

If more work moves from per seat SaaS into usage based AI tools, recurring revenue can become less predictable, procurement gets tougher, and gross margins can compress as software absorbs higher compute intensity and faster feature parity. 

In that world, a lower sector multiple can be rational even without a collapse in top line. 

A balanced takeaway: Microsoft can remain a winner while software multiples reset. 

The most important variable is ROI velocity: how quickly AI related revenue scales relative to AI related costs, and how quickly enterprises treat AI add ons as essential rather than experimental.

The market's rebound on Friday and Monday looks like relief, not resolution.

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