Software Stocks Are Finally Priced for a Comeback, This Veteran Strategist Says. He’s Buying.

Why It Matters

If software valuations rebound, investors could capture outsized upside while reducing stress on private‑credit portfolios that have suffered from redemption spikes. Lee’s call signals a potential sector rotation that could reshape equity and credit allocations.

Key Takeaways

• S&P Software Index down ~18% YTD, lagging broader market
• Lee adds iShares Expanded Tech‑Software ETF to top sector picks
• AI seen as catalyst, not threat, for leading software firms
• Software rebound could lower private‑credit redemption risk

Pulse Analysis

The software sector has been a laggard in 2026, with the S&P 500 Software Industry Index falling roughly 18% while the broader market posted a modest 5% gain. This divergence stems largely from investor anxiety over AI disruption, yet the underlying revenue growth has outpaced the S&P 500 since 2016. Fundstrat’s veteran strategist Tom Lee believes the market is over‑penalizing software, especially the heavyweight names—Microsoft, Alphabet, Amazon, Salesforce and Adobe—that are well‑positioned to embed AI into their product suites. By recommending the iShares Expanded Tech‑Software Sector ETF, Lee signals confidence that the sector’s fundamentals will soon re‑align with its valuation.

Lee’s thesis hinges on an asymmetric risk‑reward outlook for the next one to two years. While a V‑shaped bounce may be unrealistic, the “setup is favorable” as software firms increasingly monetize AI‑driven efficiencies and new use cases. This perspective contrasts with the bearish narrative that AI will cannibalize software revenues; instead, the technology is expected to act as a growth engine for the most adaptable companies. Investors with a longer horizon may find the sector attractive, especially as historical patterns suggest software outperformance often materializes late in the cycle.

A secondary but significant implication of a software recovery is its impact on private‑credit markets. Fundstrat notes that redemption pressures have risen as investors fear a prolonged software slowdown. Should software equities regain momentum, the perceived credit risk would diminish, bolstering underwriting capacity for firms like Blue Owl, Blackstone, Apollo, Ares and KKR. In essence, a software rally could serve as a dual catalyst—driving equity upside while stabilizing a stressed segment of the credit market.