Software stocks sell-off bottomed out? Hedge funds speak out: Have bought on the dip

Since early 2026, influenced by multiple factors such as AI technology impacting business models, market panic spreading, and high valuation pressures, the stock prices of major U.S. software giants like Oracle and Salesforce have experienced deep corrections, with many individual stocks falling over 20% this year, and some even halving in value. However, amid the significant adjustments in the software sector, retail investors in the U.S. have shown a “buy more as prices fall” phenomenon. Recently, some hedge funds publicly stated that the sell-off in software stocks may have bottomed out, and they have begun to buy again.

U.S. Software Sector Faces Heavy Losses

Since the beginning of this year, the U.S. software sector has suffered a sharp decline. Data shows that year-to-date, software giants Oracle has fallen 25.2%, and Microsoft has dropped 18.61%.

Zhongyin Core Select and Zhongyin Growth Preferred Fund Manager Zhou Bin told the Shanghai Securities News that early 2026 saw AI anxiety triggering stock volatility across multiple industries. There were two main triggers: first, in the first two months of 2026, foreign companies launched AI tools that could directly replace core positions (such as code generation, insurance comparison, tax planning), triggering market panic and a “sell first, evaluate later” trading pattern; second, foreign institutions released a hypothetical report titled “Global AI Crisis 2028,” projecting large-scale AI replacement of white-collar workers, impacting consumption, and disrupting intermediary business models, further amplifying market anxiety.

In Zhou Bin’s view, the essence of this wave of volatility is the market shifting from “AI celebration” to “disruption panic,” resonating with valuation adjustments. Information intermediary and knowledge service industries such as software, wealth management, and insurance brokerage are the first to be affected because AI is directly weakening their competitive advantages based on information asymmetry and human resources. Coupled with previous overvaluation and the large investments by giants in AI with uncertain returns, this has triggered concentrated fund sell-offs, intensifying market turbulence to some extent.

Guotai Fund analyzed for the Shanghai Securities News that this year’s AI anxiety and related industry stock fluctuations in the U.S. market are fundamentally a market reaction to AI’s disruptive potential, mainly due to AI’s deep impact on industry profit models. These shocks are concentrated in asset-light industries relying on information asymmetry or repetitive knowledge services—software faces disruption of SaaS subscription models, while wealth management and insurance brokerage are affected by AI replacing intermediaries and compressing profit margins, raising concerns about their long-term profitability.

Hedge Funds Re-enter the Market

However, while the software sector experienced panic selling, retail investors in the U.S. are accelerating their bottom-fishing. Data compiled by JPMorgan shows that although the S&P 1500 Software and Services Index has fallen nearly 20% since the start of the year, retail trading activity in the sector is approaching record levels.

JPMorgan strategist Arun Jain said that although some market sectors continue to show cracks, retail investors remain supportive of the software industry.

Recently, Sydney-based hedge fund GCQ Funds Management publicly announced that the sell-off in software stocks has bottomed out, and they have taken advantage of the market correction to buy about 200 million Australian dollars (approximately $143 million USD) worth of tech stocks. The fund sold some high-performing stocks, including holdings in European luxury brands, and reallocated funds into the previously heavily fallen software sector.

Nvidia CEO Jensen Huang also stated after the earnings report that the market has seriously misjudged the threat of AI to software companies. He said AI assistants will not replace existing software tools but will instead become users of these tools, helping software companies significantly improve development and operational efficiency.

Wall Street investment bank Wedbush also expressed support for software stocks. In a recent report, Wedbush stated that the market is currently “overestimating doomsday scenarios” for the software industry, with concerns being exaggerated. It named Microsoft, Palantir Technologies, CrowdStrike, Snowflake, and Salesforce as the five most promising software stocks during this “software winter.”

Goldman Sachs’ commodities brokerage division noted in a report that although hedge funds’ short positions on the software and information technology services sector have recently reached historic highs, the recent rebound in these stocks could continue.

Guotai Fund believes that in the long run, this wave of volatility will gradually return to rationality, with stock price differentiation intensifying: companies that can leverage AI to optimize models and build new barriers will be revalued; those lacking core competitiveness and easily replaced by AI will face long-term pressure.