Is the "AI Disruption Theory" in the software industry cooling down? After short positions hit a 17-year high, hedge funds are starting to "buy back aggressively."

The Zhitong Finance APP notes that after experiencing heavy selling pressure for months due to concerns over AI disruption, software stocks seem to have reached a bottom—at least for now.

The S&P 500 Software Index just posted its best week since May. The closely watched iShares Expanded Tech-Software Sector ETF (IGV.US) has just recorded its strongest weekly gain in 11 months. Since February 23, the index has risen a cumulative 14%, following market turmoil triggered by Citrini Research’s dystopian vision for the future of AI.

Despite this week’s pullback narrowing the gains, these stocks still appear cheap due to the sell-off that began in the second half of last year. Goldman Sachs’ basket of software stocks has a forward price-to-earnings ratio of 22 times, while the S&P 500 index stands at 21 times. Over the past decade, the average price-to-earnings ratio for this basket of stocks has been 52 times, compared to 19 times for the S&P 500 index.

Cloud software provider Salesforce (CRM.US) has a price-to-earnings ratio of less than 15 times, while its 10-year average has been 46 times. Microsoft’s (MSFT.US) price-to-earnings ratio is 22 times, below its 10-year average of 27 times.

Hua Cheng, a fund manager at Mirova managing $39 billion in assets, stated, “We see a huge disconnect between valuations and high-quality fundamentals, where the risks seem to be exaggerated.”

Software Price-to-Earnings Ratios Near Historical Lows

“Risk” has been a keyword surrounding software makers as investors worry about the impact of AI on these businesses. The logic is that if AI entities can write code, businesses could build software suites themselves, eliminating the software companies from which they once purchased services.

With each new development from AI startups like Anthropic and OpenAI, stocks in industries from finance to travel, and certainly software, have been sold off. In fact, on the very day Citrini’s research report was released, IBM’s stock price plummeted after Anthropic launched a tool that sparked the aforementioned concerns.

Throughout the sell-off, many software stock bulls claimed that worries about profit and revenue growth prospects were exaggerated. However, stock prices continued to decline, ultimately resulting in IGV dropping 35% from its September peak to its recent bottom on February 23.

Since then, software stocks have been staging a rebound. According to Deutsche Bank data, hedge funds have turned bullish on the sector after short positions hit a 17-year high at the end of February. Goldman Sachs’ basket tracking software companies and semiconductor companies has risen about 9% this month, as investors are covering software stock shorts and unwinding crowded chip stock positions.

Options trading has also shown a similar shift in sentiment, with positions moving from deeply oversold levels to active bullish engagement, leading to a surge in demand for risk exposure in the software sector.

One factor driving the rebound is an event held by Anthropic on February 24, where the company showcased new tools developed in collaboration with several well-established firms that were previously under the traders’ “crosshairs.”

Another factor is the fundamentals. Even as stock prices were sold off, profit expectations for 2026 have continued to rise. Data shows that software and services companies in the S&P 500 are expected to see earnings growth of 21% this year, up from 17% at the end of 2025. In the fourth quarter, 93% of software companies in the S&P 500 exceeded profit expectations, while the corresponding figure for the broader index was 74%.

“After consulting various experts, generalists, Gemini, ChatGPT, and Claude, we still have not encountered any software company that expects AI to negatively impact revenue in 2026,” wrote Deutsche Bank strategists in a report released on Tuesday, where they upgraded their rating on software stocks within the technology sector to “overweight.” “We believe concerns about AI disruption have peaked.”

This may explain why there has been a surge in buying. Michael Toomey, managing director of Jefferies’ equity trading desk, stated that last week, investors who were only long on positions bought software stocks at twice the rate of selling.

“Such extreme deviations are noteworthy,” he said, “the hysteria at the peak has washed everyone out.”

The Software Industry Has Rebounded from Recent Lows

Share buyback commitments have also helped bolster stock prices. Salesforce and Wix.com Ltd. are among the software companies that have committed to actively repurchasing beaten-down stocks. Salesforce plans to sell up to $25 billion in debt to fund its buyback.

“We are increasing our stock repurchase authorization to $50 billion because these prices are just too low,” said CEO Marc Benioff during the company’s earnings call on February 25. “This is not our first experience with the ‘SaaS apocalypse.’”

Wix, with a market capitalization of less than $5 billion, began its buyback auction last week using a “modified Dutch auction” method for up to $1.75 billion worth of stock. Executives at Intuit Inc. indicated during their earnings call at the end of last month that the company also aims to “significantly increase” buybacks this year.

Chris Galipeau, senior market strategist at Franklin Templeton, believes such announcements are typically positive signals.

“If you are a CEO and announce this, the only reason you would do so is that you believe your business is well-positioned, the concerns around it are exaggerated, and this is the best use of capital you see,” he said.

However, signals of insider buying remain absent. According to data compiled by Washington Service, software company executives purchased $30.9 million in stock in December, the highest amount in nearly two years. As the stock sell-off escalated in January and February, this trend significantly slowed.

“This is not just stock buybacks, but accelerated buybacks, which highlights management’s confidence in the outlook,” Galipeau said, “insider buying could further reinforce this signal.”

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