Software stocks have slumped to levels not seen since the dotcom bust, with the S&P 500 software sector underperforming the broader index by 35% since July 2025. Jefferies analyst Desh Peramunetilleke noted the sector has dropped 20% this year, with the steepest decline occurring on January 29th when shares fell 7% in a single session.

The downturn extends beyond U.S. borders, with Japanese software shares down 25% this year and European counterparts falling about 18%. Other service-heavy industries including financial services and commercial sectors face similar pressures as AI-related disruptions reshape market expectations across multiple sectors.

Valuations have compressed from 33 times earnings to 21 times, now aligned with the broader market. Peramunetilleke warned that revenue and margin risks could make past valuation premiums unjustified, potentially causing software stocks to trade at a discount as AI-driven transformations become more evident.