Investors Abandoned Software Stocks... That May Be a Mistake

Dear reader,

After a brutal selloff earlier this year, software stocks are quietly coming back to life - and investors may be overlooking one of the better opportunities in the market right now.

For most of 2026, investors wanted exposure to one thing: AI infrastructure.

Money poured into semiconductors, memory stocks, power companies, data center builders, and anything tied directly to the AI spending boom.

Meanwhile, software stocks were largely left behind.

At the April lows, the iShares Expanded Tech-Software ETF (IGV) had fallen as much as 37% from its October 2025 peak.

That is an enormous correction for a group filled with some of the highest-quality technology businesses in the world.

The top holdings in ETF include:

But something interesting has happened over the last several weeks.

While semiconductor and memory stocks have started pulling back and digesting massive gains, software stocks have quietly rebounded to their best levels since January.

The question now becomes: Is this simply a dead cat bounce — or is a much larger rotation beginning?

I believe investors should pay very close attention.

Many software companies still generate recurring subscription revenue, high margins, and enormous free cash flow — all while maintaining sticky enterprise customer bases and increasingly important AI capabilities.

And unlike many of the AI infrastructure trades that already experienced massive multiple expansion, a lot of software names are still trading well below prior highs despite improving fundamentals.

In many ways, software may be becoming the “next phase” of the AI trade.

The market initially focused on building the infrastructure layer:

But eventually investors start looking at who monetizes AI applications at scale.

That is where software comes in.

Companies that successfully integrate AI into workflow automation, cybersecurity, customer service, enterprise productivity, coding, and analytics could see meaningful acceleration in both growth and profitability over the next several years.

We are already beginning to see signs of that shift.

ServiceNow $NOW ( ▲ 2.45% ), for example, recently delivered strong results and continues positioning itself as a major enterprise AI platform. Investors are starting to realize that AI may actually increase the value of many software businesses rather than disrupt them.

And importantly, sentiment toward the sector became extremely negative earlier this year.

Historically, some of the best long-term investment opportunities emerge when high-quality growth businesses experience deep corrections despite strong secular tailwinds remaining intact.

That does not mean software stocks will move straight higher from here.

Nor does it suggest all software stocks will flourish in an AI-driven world.

Volatility is always possible and likely.

But after a 30%+ correction in many names, risk/reward is beginning to look much more attractive than it did several months ago.

Especially if we continue seeing rotation out of overheated AI infrastructure trades and into quality software businesses that still have significant catch-up potential.

The bigger picture remains the same: AI is not slowing down — it is expanding.

And software companies may ultimately become some of the biggest beneficiaries of the next phase of the AI revolution.

Investors willing to look beyond the obvious trades today could be positioning themselves well for the next 12–18 months.

That is exactly why I have my team working behind the scenes on a new AI Software Portfolio - a basket of software stocks I believe are positioned not only to rebound from this pullback, but potentially emerge as some of the next major AI winners.

Here’s to the future,
Matt McCall
Founder, NXT Wave Research