The software trade has not just cooled – it has been aggressively repriced. The artificial intelligence (AI) excitement has turned into AI anxiety, with investors questioning which business models will remain strong and which will be disrupted. Consequently, the sector has undergone a meaningful markdown worldwide. Sector P/E premiums have compressed, well below the historical average, although earnings momentum still ranks among the stronger pockets of the market.
According to UBS analyst Andrew Garthwaite, software is now “6.1 standard deviations oversold,” pointing to a rare disconnect between stock prices, earnings trends, and macro variables. UBS’s Market Narrative model suggests U.S. software screens nearly 40% undervalued, though Garthwaite cautions that a weaker dollar clouds the outlook for European peers. Historically, when valuations have compressed this much, the sector has outperformed mostly over a one-year horizon. Nevertheless, free cash flow yields are not broadly attractive.
