I have been observing how software stocks are falling quite aggressively, and the interesting thing is that Wall Street seems to be viewing this as an opportunity rather than total panic.

What happened this week was quite revealing. The ETF tracking this sector rose 6.4% in just two days, which is a significant move considering that software stocks have been declining for months. The North American software S&P index closed at its lowest since November 2023, with a year-to-date decline of 24%. But here’s where it gets interesting: while stocks are falling, valuation ratios have collapsed dramatically. We went from 40 times earnings in July to just 21 times now, compared to a historical average of 34 times. Salesforce is trading below 13 times its earnings when its average is 45 times. Adobe is almost 60% below its average of 30 times.

Some Wall Street strategists argue that current fear has already surpassed the reality of fundamental changes. Emily Roland of Manulife John Hancock expressed it well: thinking that AI will destroy all software companies is premature, at least for now. But what’s fascinating is that while sector stocks are falling, analysts are revising earnings projections upward. The expected growth for 2027 increased from 15.7% to 16.5% according to Bloomberg data.

From a technical perspective, Adam Turnquist of LPL Financial noted that the index found support near 1,600 points. If it manages to break above 1,908, we would be seeing a double bottom pattern. Although he warns that stocks are still in a downtrend, momentum and volume suggest selling pressure could be easing.

But here’s the tricky part: the market remains fragile. On Tuesday, when news broke about Anthropic preparing an AI tool for web design, the day’s winners evaporated within minutes. It reflects that sensitivity to software replacement by AI remains very high.

The real divide is between those who see this as an opportunity and those who see structural risk. Goldman Sachs maintains that this rebound is just technical oversold, not due to improved fundamentals. Other managers like Brad Conger of Hirtle Callaghan acknowledge that they are attracted to the low prices but admit that the uncertainty is too great to seek a bottom now. Brian Kersmanc of GQG Partners compared it to a forest fire: we’ll have to wait for the ashes to settle to see which companies are truly strong.

What’s clear is that software stocks will continue to be volatile as the market debates how real the AI threat is. Valuations are already at attractive levels, but the question is whether they will keep falling before Wall Street really starts buying heavily.