Earlier this spring, I authored ‘Software’s Selloff’ detailing the price deterioration across stocks within the software industry. Analyzing data from past software selloffs hinted at some key takeaways: the selloff was ‘young’ in February (and could have taken longer to bottom), and it was deep enough that investors could have expected significant earnings deterioration. With more than three months having passed and crucial data received during earnings season, the industry seems to have turned the corner.
A Bumpy Ride
Over the past eight years, the software industry (proxied by IGV) has entered ‘bear market’ territory – defined as a decline of 20% from recent high prices – five distinct times: late 2018, early 2020, 2022, early 2025, and now in early 2026. To say it’s been a bumpy ride for software investors might be an understatement.
However, not all of these drawdowns are created equally. In two cases, the decline was largely a ‘price scare’ – where valuation compressed more than earnings. The other two bear markets for software were driven largely by negative realized earnings, as shown in the chart below.
The table below summarizes key data from the chart. Back in February, IGV’s drawdown length of 22 weeks had eclipsed the trough duration of recent price scares and suggested the industry may be experiencing an earnings-led drawdown. On average, an earnings-led drawdown in the industry saw prices trough in week 32 of the drawdown, implying the 22 week bear market in software may have been ‘young.’
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As of May 29, 2026, IGV traded at its 52-week low on April 10, 2026. Should this low hold as the trough of 2026’s software bear market, it would register as a 36% drawdown over 30 weeks, nearly exactly the average time and drawdown of earnings-led bear markets, as shown below.
However, there’s little earnings drawdown so far in 2026! In fact, trailing twelve months earnings for the industry just hit highs according to FactSet (and shown in the chart above as 0% earnings drawdown). So did the industry just go through its worst ever price scare, or are earnings on the brink of falling? Investors this earnings season heard that some companies are adapting to AI and may even be beneficiaries of the technology, hinting that earnings may remain strong.
Earnings Commentary
Two of the worst hit software stocks during this bear market include DataDog and Snowflake. Both stocks experienced a greater than 50% price drawdown from their November 2025 highs to their 2026 lows. But both have led the charge higher thanks to robust earnings reports and encouraging forward looking commentary:
- DataDog CEO Olivier Pomel: “[We] delivered revenue growth of 32%, accelerating from 29% last quarter…Our AI-native customers cohort continue to grow and diversify rapidly.”1
- Snowflake CEO Sridhar Ramaswamy: “AI is fundamentally reshaping how work gets done, and Snowflake is at the center of the transformation…Product revenue growth accelerated to 34%, up from 30% last quarter…AI is compounding Snowflake’s advantage in data.”2
Investors responded positively to these earnings reports and commentary, sending shares of Datadog 31% higher the day following their report, and Snowflake gained +36% the day following their report. Investors typically reward companies that are accelerating revenue growth as it may indicate product-market fit and a pathway to future earnings.
Software stocks have had a bumpy ride as of late, experiencing five bear markets in the last eight years. 2026’s bear market hasn’t returned to prior highs yet, but the trough so far experienced is within averages of previous bear market troughs, suggesting that investors may be preparing for the worst. However, with even a small sample of companies reporting accelerating revenue growth and positive commentary as to how they’re adopting AI, perhaps investors have seen the worst of Software’s Selloff.
- https://finance.yahoo.com/quote/DDOG/earnings/DDOG-Q1-2026-earnings_call-554355.html
- https://finance.yahoo.com/quote/5Q5.HA/earnings/5Q5.HA-Q1-2027-earnings_call-568996.html
For more content by Blake Anderson, CFA®, Director, Portfolio Management, click here.
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