Software stocks are having a 'full-fledged breakdown' - and they may fall even further

By Emily Bary

A strategist notes that the sector is once again testing a technical support level, which increases the likelihood that it will break that support

ServiceNow is among the software stocks seeing sharp declines in Thursday's trading action.

Software stocks are experiencing another brutal selloff on Thursday, and one technical strategist suggests more pain could be ahead for the beaten-down sector.

The iShares Expanded Tech-Software ETF IGV is off 4.4% in Thursday afternoon trading, coursing toward its worst one-day performance since February. High-profile stocks like Okta (OKTA), Snowflake (SNOW) and Zscaler (ZS) are each off more than 10%, while Palantir Technologies (PLTR) and ServiceNow (NOW) are both down more than 8%.

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The IGV is now trading below $77, which BTIG strategist Jonathan Krinsky said marks the seventh time that the exchange-traded fund has tested that key level of support since the start of 2024. "The more times a level is tested the more likely it is to break," he wrote in a note to clients.

The pattern suggests that more downside could be in store, as the ETF could fall to $70 or even $65, a level that's about 15% lower than where the fund trades now.

It's worth pointing out that the weakness in software stocks has coincided with strength in semiconductor stocks, creating a massive dispersion in performance beneath the hood of the technology sector.

The three-month correlation between the excess returns of IGV and the VanEck Semiconductor ETF SMH has fallen to its lowest level since at least 2011, according to Dow Jones Market Data. This is reflected in the chart above.

Hanging over the sector is the fear of product announcements from Anthropic and rivals, which suggest to some investors that new AI tools may disrupt software business models. Whether those worries are justified has gotten to be beside the point as the software trade continues to unwind.

"The reality is there is simply a buyers' strike around software," Evercore ISI analyst Kirk Materne said in a note to clients.

Read: 3 factors that could get software stocks going again after a brutal stretch

He added that extreme declines like those seen Thursday, "or frankly over the last three months, are not based on investors selectively applying AI risk on a company-by-company basis." Rather, investors are pulling out of the software sector or outright shorting it, which he thinks "is ironic as the biggest weightings of the IGV are names where the risk from AI is more argumentative," such as Microsoft (MSFT) and Palantir.

Materne also highlighted that an awkward transition is taking shape, as software stocks go from being growth- or momentum-oriented plays to being value stocks.

See more: Software stocks are in bargain territory - and that's reviving an age-old debate

"Many of the companies either don't embrace this view or don't accept it which feeds into the buying vacuum," he wrote. "All of this is why we've been expecting any bottoming process to take time and be super volatile."

What does this dynamic mean for the broader market? BTIG's Krinsky wrote that arguably "the biggest question" right now is whether the stock market can advance despite "a full-fledged breakdown from what was once a key industry group."

That said, he noted that the market has held up fine without positive contributions from the software sector when looking over a multiyear span. Since the start of 2024, the IGV has lost 6%, while the S&P 500 SPX has increased 42%.

Mike DeStefano and Joseph Adinolfi contributed.

-Emily Bary

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04-09-26 1552ET