U.S. software stocks have been moving sharply in both directions, creating a difficult market for investors trying to separate business fundamentals from trading activity.
Artificial intelligence remains a major source of uncertainty, while momentum strategies, options and leveraged exchange-traded funds are adding force to daily price moves.
The result has been a sector where strong earnings can trigger rapid rallies, yet concerns about AI can quickly bring sellers back.
A Sharp Rise and Fall
The S&P 500 software and services index (.SPLRCIS) reached a record high on October 28. By April 10, the index had lost more than 33% of its value. Selling picked up after Anthropic released a new product in January, raising concerns among some portfolio managers that advances in AI could make certain software products less useful or even obsolete.
The decline did not last in a straight line. The index later recovered 33% during a generally solid first-quarter earnings season. Another sell-off followed, before the sector regained some ground during a largely healthy second-quarter earnings period.
Despite those rebounds, the index remained down more than 3% for the year and more than 12% below its October record.
The next major earnings tests include Salesforce (CRM.N) and CrowdStrike (CRWD.O), which are scheduled to report Wednesday afternoon, followed by Oracle in mid-September. Their results could offer investors another look at whether software companies can maintain growth while AI changes customer demand and competition.
Momentum Adds Fuel
AI concerns explain part of the volatility, but trading behavior has also played a major role. Momentum trading is based on a simple idea: traders buy stocks that are rising and sell those that are falling. When many investors follow the same direction, price movements can become larger than the underlying change in a company’s business outlook.
Tony Welch, chief investment officer at SignatureFD, said some recent earnings produced “eye-popping” strength. Still, he questioned how much of the summer rally came from better confidence in company fundamentals and how much came from traders expecting prices to keep climbing.
“These rallies, they start because there is an impending fundamental improvement that the market participants sniff out, but then they continue to build on themselves with momentum,” Welch said.
He added that later stages of a market move tend to depend more heavily on momentum.
Microsoft Corp. (MSFT.O) provided a clear example. The world’s largest software company and the biggest stock in the index gained 29% across eight trading sessions after its July 29 earnings release. Such a rapid move can attract additional momentum traders, potentially pushing prices higher even after the initial earnings reaction has passed.
Leveraged ETFs Raise the Stakes
Another factor is the growing use of leveraged financial products. Joe Saluzzi, co-founder and head of equity market structure research and co-head of equity trading at Themis Trading, pointed to double-leveraged ETFs and single-day options as important sources of trading activity.
Leveraged ETFs can target twice the daily return or decline of an underlying stock or index. Some products also seek three times the daily move of major indexes. These funds have grown quickly, especially around popular technology names.
Morningstar data shows that the number of single-stock leveraged or inverse ETFs climbed to 486, compared with just 28 at the end of 2023. Around 40 of these funds fall into the software-infrastructure category, while another 23 focus on software application companies.
The structure of these ETFs matters. Fund providers typically adjust their positions at the beginning of each trading day to maintain the targeted exposure. When traders pile into the same direction, that rebalancing can add pressure to the underlying shares.
“That’s where you tend to see the most of that in action, in those momentum names,” Saluzzi said. He noted that day traders using leveraged products can help reinforce momentum.
Trading activity can also accelerate when sentiment changes. Saluzzi said activity often cools when a move weakens, but traders can return quickly once momentum picks up, sending options volume sharply higher.
More Trading Products Enter the Market
The supply of products designed to profit from falling prices has also expanded. Over the past two months, Corgi Investments, a newcomer to the ETF industry, introduced a group of inverse ETFs linked to individual stocks and indexes.
The launch includes 11 products tied to individual software companies, including Microsoft, Oracle, AppLovin (APP.O) and ServiceNow (NOW.N). These products give traders another way to position themselves around major software names without simply buying or selling the underlying shares.
The growing number of leveraged and inverse products means software stocks now face trading pressure from several directions. Traditional investors may focus on earnings and valuations, while short-term traders can react to price patterns, options activity and daily momentum.
Earnings Offer Some Support
Company results have provided a more positive signal. Based on reported results and estimates, the software and services index was on track for 24.4% aggregate second-quarter earnings growth. That compared with an expectation of 16.4% on July 1, before companies began reporting, according to Tajinder Dhillon, head of Earnings Research at LSEG.
Those numbers suggest that software companies have delivered better earnings performance than investors initially expected. Yet strong results have not removed concerns about AI.
The key question is whether AI will increase software demand or replace products that have historically generated revenue. That uncertainty makes it harder for investors to judge how much of a company’s current earnings growth can continue.
Marta Norton, chief investment strategist at Empower, said stock prices already reflect recent earnings performance and expectations for continued earnings growth. “But to the extent that that is not true, then there is real risk in these stocks,” Norton said.
What Comes Next for Software Stocks?
The sector now faces a combination of strong earnings, AI-related uncertainty and unusually active trading strategies. A company can report better-than-expected results and still see its stock move sharply if investors change their expectations about future growth.
Salesforce, CrowdStrike and Oracle will provide important earnings updates in the coming weeks. Their results may help investors judge whether recent software strength reflects durable business performance or whether momentum has become a larger part of the price action.
Software stocks remain caught between two forces. Corporate earnings have shown meaningful strength, while AI concerns continue to challenge assumptions about future demand. At the same time, momentum trading, leveraged ETFs and options can magnify short-term moves in either direction.
That combination helps explain why the sector has experienced such large swings and why sharp rallies or declines could continue as investors reassess both earnings and AI’s long-term impact.