Investors Are Dumping Software Stocks and Earnings Won’t Stop It

The divergence between results and stock market performance has made software “the new value sector,” Bank of America strategists led by Savita Subramanian declared in a Feb. 20 note to clients. They have a point, as the S&P 500 software and services index is trading for less than 21 times earnings over the next 12 months, its lowest level in more than three years and far below its five-year average of 29.

Salesforce, which reports results Wednesday, is expected to post revenue growth of about 12% and a roughly 10% rise in adjusted earnings from a year ago (net earnings are seen sliding 15%.) Consensus estimates for both net earnings and revenue have largely held up for 2026 and 2027. As a result, Salesforce shares are the cheapest they’ve ever been at about 13 times estimated earnings.

Workday, which reports Tuesday, is expected to show double-digit revenue growth while net earnings more than double. The stock is also trading at a record-low multiple, although analysts have started to reduce their estimates for net earnings.

Of course, there’s no telling how far AI’s impact on the software industry will be felt. The disruption may be limited to financials or it could reach deep into the business. That uncertainty makes forecasting years out a bit of a moving target, which is new for companies that historically generate durable and consistent growth. While expectations for 2026 software earnings in 2026 are improving, 2027 estimates have shrunk since December, according to Bloomberg Intelligence data.

“The level of uncertainty is so high that I’m not sure you can make peace with estimates past 2026, which means it’s hard to say that software as a whole is cheap, even if some names will ultimately be winners,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.

Wall Street is likely to remain skeptical of the sector regardless of what the latest results show, Samana said. This is especially true for companies like Salesforce that have long underperformed the market. Its stock is down 24% over the past five years, while the S&P 500 is up 76%.

“The company didn’t exactly have it together coming into the distribution of AI, and disruption is only accelerating,” he said. “Not only would you need a remarkable announcement to change sentiment, but then they’d have to continue proving they can thrive over the coming months.”

For many others, he added, positive results or forecasts will only postpone the coming AI reckoning.

“If we see positive results, it will be a sigh of relief that AI is a 2030 story, not a 2027 story,” Samana said. “Ultimately the direction is in the path of huge disruption, and not everyone is going to make it.”

Tech Chart of the Day

International Business Machines Corp. shares had their worst day in more than 25 years on Monday, after AI startup Anthropic said its Claude Code tool can help modernize Cobol, a dated programming language that’s run on IBM computers. The stock plunged 13% in its biggest single-day percentage loss since October 2000. With the decline, IBM shares have fallen 27% in February, on track for their biggest one-month slide since at least 1968, according to data compiled by Bloomberg.

Top Tech Stories

• Artificial intelligence may significantly displace workers and disrupt consumption-driven economies like the US in the near future, according to Alap Shah, co-author of a Citrini Research report that fueled a scare-trade selloff, and who is now calling for an AI tax to cushion job losses.

• Anthropic is offering some current and former employees the ability to sell shares in the company at a valuation of about $350 billion, according to people familiar with the matter — allowing them to cash in at the level of a recent $30 billion fundraising.

• Anthropic said three leading artificial intelligence developers in China worked to “illicitly extract” results from its AI models to bolster the capabilities of rival products, adding to growing concerns in the US about Chinese firms improperly gaining an edge.

• Fear of AI’s potential for disruption is enough to push up borrowing costs for software companies, causing problems for a sector that has a lot of debt, according to Arini Capital Management’s founder Hamza Lemssouguer.

Earnings Due Tuesday

• Earnings premarket:

• Earnings postmarket:

–With assistance from Henry Ren.

(Updates to market open and adds detail about new Anthropic tools. A previous version corrected a typo in the company name in the ninth paragraph.)

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