U.S. software stocks surged last week, erasing fears of a broad-based tech sector selloff. State Street Technology Select Sector SPDR ETFXLK fell 1.8% last week against State Street SPDR S&P Software & Services ETF's XSW 9% gain. The rally in XSW came in despite the fact that the 10-year Treasury yield climbed to around 5%.
Why Software Stocks Soared
The rally mainly happened because investors rotated out of the crowded, capital-heavy AI-infrastructure trade and back into beaten-down enterprise software—especially cybersecurity—while earnings and buybacks reinforced the value case.
According to a report by Bloomberg, the S&P 500 Software Index has just recorded its strongest weekly performance since May, as reported by Economic Times.
Investors have also been reassessing technology valuations amid rising rates and heavy corporate borrowing. With software stocks apparently less capital-heavy and less debt-laden, the segment is less exposed to rising rates.
Key Drivers
Rotation Away from AI-Capex Anxiety
Meta's plan to raise capital for its AI buildout intensified concerns about how hyperscalers will finance enormous data-center spending. Investors sold AI-infrastructure-linked names and bought assets perceived as less dependent on that funding cycle, including software.
NVIDIA-backed neocloud major CoreWeaveCRWV and bonds slumped ???lately on investor worries over debt financing. CRWV shares have lost 40% over the past month (read: Are Concerns Over CoreWeave's Debt Overblown? ETFs in Focus).
Cybersecurity Emerges Winner
A global alert over cyber threats caused by rogue AI agents triggered a security scramble, lifting Okta, Palo Alto Networks, CrowdStrike, and Cloudflare. AI safety concerns and rising cyber threats are creating new tailwinds for the cybersecurity sector. Okta surged 12% last week, Palo Alto added 7.2%, CrowdStrike jumped 12% and Cloudflare rose 6.8%.
Attractive Valuation
Software was hit hard by AI-disruption fears, creating a bargain-hunting setup. Strong earnings expectations—roughly 27% projected earnings growth for Internet - Software firms —and large buyback announcements from companies such as Salesforce and Wix helped restore confidence. Per Economic Times, lower valuations led Salesforce and Wix to binge on buybacks.
The Zacks categorized Internet – Software industry currently trades at a forward price/earnings ratio of 20.75X versus the S&P 500's 18.63X. Price/sales ratio of the industry (at 3.23X) is also in line with the S&P 500 (3.10X). The industry trades at a price/book ratio of 3.28X versus the S&P 500's score of 3.66X, which makes the industry cheaper than the S&P 500.
Bottom Line
Valuation reset, earnings resilience, buybacks and AI monetization showed that the future ahead of software stocks is anything but dark. Meanwhile, cybersecurity stocks are serving to the AI-led attack complexity. Cybersecurity can be tagged as a relatively defensive play in the tech bunch.
ETFs in Focus
Against this backdrop, below we highlight a few software ETFs like iShares Expanded Tech-Software Sector ETF(IGV) and XSW. The group also has some pure-play cybersecurity ETFs like Amplify Cybersecurity ETFHACK and First Trust NASDAQ Cybersecurity ETFCIBR. IGV has added about 5.2% last week. HACK was up 1% while CIBR surged about 6%.
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This article originally published on Zacks Investment Research (zacks.com).
