TLDR
- Software sector dropped 25% year-to-date, creating buying opportunities according to Bank of America analysts
- BofA recommends four stocks: Snowflake, MongoDB, Datadog, and JFrog as likely to rebound when sentiment stabilizes
- Software stock decline mirrors contradictory investor behavior, selling tech while buying commodity-dependent stocks
- Major software companies see steep losses: Oracle down 53%, CoreWeave down 51%, Salesforce down 45% from highs
- Analysts split on whether decline is sector-wide or company-specific, with some expecting recovery as AI adoption clarifies
The software sector has taken a beating in 2026. Bank of America sees opportunity in the wreckage.
The sector is down 25% year-to-date, with no company escaping the selloff. BofA analyst Koji Ikeda identified four stocks positioned to outperform once market sentiment stabilizes.
Snowflake tops the bank’s list. The company continues to solve data management problems for AI workloads.
BofA expects any volatility around Snowflake’s FY27 revenue guidance to present a buying opportunity. The firm believes the company is positioned as a long-term winner in the AI data cloud market.
MongoDB earned BofA’s second recommendation. The database company is seeing accelerating Atlas growth and strong demand for its JSON document database.
The bank described MongoDB’s technology as setting up the business for long-term gains in new AI workloads. High expectations into the next earnings report could create entry points on any weakness.
Datadog and JFrog Round Out Recommendations
Datadog faces concerns about competition and slowing growth. BofA pushed back on these worries, noting that observability remains mission critical for AI-native companies.
The firm expects non-AI native growth trends to serve as a catalyst for the stock. Broad adoption among AI companies supports the long-term case.
JFrog completes BofA’s list. The bank argues that more AI leads to more binaries, which drives demand for JFrog’s services.
The stock’s recent decline appears overdone based on fundamentals. Demand for binary management and security should stay strong as AI increases code volume and operational risk.
The software meltdown reflects contradictory investor behavior. Investors are dumping tech stocks over AI spending concerns while buying commodity-dependent companies.
They’re selling software stocks based on fears that AI will make them obsolete. At the same time, they question whether companies are adopting AI technology fast enough.
Bank of America’s Vivek Arya compared the selloff to last year’s DeepSeek panic. The stock losses suggest AI spending is unsustainable while also implying AI will be so pervasive that software becomes obsolete.
Market Shows Severe Weakness in Individual Names
Information technology and financials are 2026’s worst-performing sectors. They’re down 1.3% and 2.3% respectively.
The Magnificent Seven tech companies dropped 2.1%. The iShares North American Tech-Software ETF is underperforming the Nasdaq by the most in over two decades.
Oracle sits 53% below its 52-week high. CoreWeave fell 51%, while Salesforce dropped 45%.
Workday and Adobe declined 42% and 41% respectively. Duolingo crashed more than 78% from its May 2025 peak.
Capital Economics’ James Reilly believes the decline ties to company specifics rather than sector-wide problems. He expects the stock market to rally soon.
Bret Kenwell from eToro said software stocks are likely nearing capitulation. He questioned whether investors will place a new ceiling on valuations, potentially limiting recovery upside.
Arya expects volatility to moderate as earnings and guidance clarify the outlook. Gartner estimates AI capex will reach $2.5 trillion this year, connecting spending to widespread adoption over the next several years.
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