By Blake Anderson, CFA®, Associate Portfolio Manager
Software-focused technology firms are among the weakest stocks so far this year. The pace and magnitude of this drawdown rival other notable bear markets and might have some investors calling 2026 a ‘tech wreck.’ Yet this weak price action – largely fueled by fear of AI disruption – appears disconnected from fundamentals, as forward earnings expectations for many of these companies have improved.
A Weak Start
Shares of major software companies have had a poor start to 2026, with many now entering bear markets (defined as a decline of -20% from recent high stock prices). As shown below, the iShares Expanded Software ETF (IGV) is experiencing one of its worst three-month returns of the past decade, having declined more than -25% in just the last 63 trading days. The pace and magnitude of this drawdown rival the interest-rate driven bear market of 2022 and is even worse than the early days of the Covid-driven selloff.
Fueled By Disruption Fears
In my view, a leading driver of this tech selloff is fear of disruption from emerging AI powerhouses such as OpenAI and Anthropic. Recent product innovations – notably Anthropic’s Claude AI agents – have raised concerns that these platforms could pose existential risk to incumbent software business models. This debate moved squarely to the forefront during Microsoft’s most recent earnings call.
Microsoft was long viewed as an ‘all-in-one’ potential AI beneficiary. Its ownership in OpenAI – now one of Microsoft Azure’s largest customers – positioned Microsoft to benefit from AI breakthroughs, while their innovation promised to transform how users interact with Excel, Word, PowerPoint, and many other Office 365 products. The core thesis was simple: accelerating Azure revenue growth would validate OpenAI’s success, which in turn could power better Microsoft products.
However, Microsoft’s latest earnings call struck investors like an alarm bell. The company disclosed that Co-Pilot, one of its leading AI products, has ‘only’ 15 million subscribers out of more than 450 million estimated potential users. Further weighing on investors’ minds was Azure’s revenue ‘only’ growing 39% when estimates were for 40% or higher. Microsoft CFO Amy Hood noted that during the quarter Microsoft redirected some new GPU capacity toward internal development, capacity that otherwise could have supported Azure revenue growth.
In effect, Microsoft chose to trade off current revenue for potential future revenue.
Investors were not happy. After years of development and billions of dollars spent, adoption appears sluggish. Some may also interpret this as an implicit acknowledgment that competitive threats from newer AI players are real – and that Microsoft may need to spend even more to defend its franchise.
Investors fear the damage may not stop with Microsoft. Many former software darlings are now deep in bear-market territory, and there may be a fundamental rationale for their declines as well. If smaller software companies rely on Azure’s GPUs to build and scale their own AI products, then Microsoft’s decision to restrain the amount of GPUs available to Azure may crimp their growth and development trajectories too.
Fundamentals Remain Strong
Despite the sharp selloff, underlying fundamentals across much of the software sector remain resilient. As shown below, next-twelve-months earnings estimates for Microsoft, ServiceNow, Salesforce, and Oracle have all risen – some by more than 10% – over the past six months. Notably, these estimates increased again during the most recent earnings season, even as share prices continued to fall.
2026 so far may feel like a ‘tech wreck’ to investors involved in the space. Stock prices of many leading software firms have fallen into bear markets akin to 2020 and 2022. This earnings season revealed new competitive threats from AI-native platforms. And while incumbents in the space have seen estimated earnings continue to increase, investors are clearly skeptical.
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