Concerns about how artificial intelligence will disrupt software companies have spooked these stocks, with Citi saying some may be ripe for a rebound. Software stocks have struggled this year as investors worry that AI will make the “software-as-a-service” business model obsolete. The iShares Expanded High-Tech Software Sector ETF (IGV) is down more than 20% in 2026 and more than 8% in February alone. Software sales intensified in early February after AI startup Anthropic launched new legal, financial and product marketing tools within its Claude Cowork agency. After a slight recovery, stocks fell again as concerns about AI disruption spread to other sectors across the market, including office real estate and wealth management stocks. But City see opportunity amidst the carnage. In a Feb. 9 memo, strategists screened software and services stocks in the Russell 3000 with market capitalizations of at least $2 billion. These companies must have declined at least 10% in the past month, and their consensus EPS estimates for 2025, 2026, and 2027 have been revised upward in the past six months. “We want to focus on stocks that have actually improved their earnings expectations while correcting and reducing their implied terminal multiples,” said Drew Pettit, U.S. equity strategist at Citi. “Essentially, in the short term, who can deliver on the fundamentals, but in the medium term, the risk is mitigated from multiple exit perspectives.” Therefore, these stocks will rise based on the fundamentals of the business, rather than the level of technical support, Pettit wrote. The list also includes Microsoft, the worst performer of the Magnificent Seven stocks in 2026. But Wall Street analysts are skeptical of the decline. In addition to being on Citi’s list, Goldman Sachs and Wedbush have also named the stock as a stock to buy in a bearish environment. Palantir also made the list. Despite reporting earnings earlier this month that beat Wall Street expectations, the stock is down nearly 37% from its 52-week high. The defense technology company also gave an upbeat outlook for full-year earnings. Pettit said these software names should attract traders’ attention once investor panic subsides. “In a well-valued, more volatile bull market, you should basically focus on earnings momentum in growth areas of the market, such as software,” he said. “However, it has not been the driving force of differentiation in recent software weakness. We believe a positive correction in software stocks will be a key underlying catalyst to bring investors back into the broader industry group and corrected names.”
