Why the Hard Times for Software Stocks May Be Over, At Least for a Little While

I suspect that unless you are directly involved with software companies, or own software stocks, you never expected what went down last fall. The entire software industry, as depicted by the Expanded Tech-Software Sector ETF (IGV), fell off a cliff. 

No, make that a steep mountain! It lost 35% in a hurry. Now it is rebounding, up 20% in just a couple of weeks. Is this the big comeback? Maybe. But since we can’t predict the future, we can assess the odds. I think they are improving. Here’s why.

If I just focus on the daily chart shown above, I’m a buyer. It bottomed in what is nearly a “head and shoulders” pattern, given that big push down during the first half of April. Recovering in the price pattern it did is where part of my optimism comes from. 

The bigger part of it, which gets me from the “high risk/high return” situation that resolved itself nicely last month into this month, to “has the makings of a nice move” is the recent price breakout. That just happened, and if it doesn’t fizzle by early next week, IGV could be a “flyer” again. 

The weekly chart backs this up. The percentage price oscillator (PPO) is close to ideal, albeit maybe a bit early. See how it looks similar to the summer 2022 bottom? But you can also see there were some false starts. Like a poorly coached NFL offensive lineman. 

Still, it recovered eventually, and more than doubled in price the next three years. I’ll say this: I like this a lot better under $100 a share than I did when it was nearly $120 and peaking on my favorite indicators. 

Speaking of my favorite indicators, my ROAR Score also indicates there’s something interesting going on here. The last time the score was green (lower risk) was for much of 2025. As you can see, green is more of a “copacetic” zone, since an ETF or stock may have already had a nice run by that point. Low risk is not the same as “priced to move.” Still, the charts above, and this one below, help me be optimistic here. 

And if you are wondering why the ROAR Score just turned to yellow (50) as you see in the upper right section of the chart, that’s what is supposed to happen. ROAR, unlike many technical systems, is built to automatically downgrade the risk level of a stock or ETF after it shoots higher. Markets just don’t maintain those big moves up or down like they used to. Too much of a trader and algorithm element is present now. Thus, the 50, and not 70 or 80, as a current ROAR Score.

What’s the Fundamental Case for IGV? 

The software industry has endured a grueling period of valuation resets and corporate belt-tightening, but the fundamental outlook for this suggests the tide is finally turning. This shift is driven by a transition from speculative growth to a focus on mission-critical utility and the stabilization of enterprise budgets.

For the past several years, software companies were penalized as the era of cheap capital ended. Organizations that had over-provisioned software during the digital transformation boom began a process of consolidation, cutting redundant software subscription seats and demanding clear returns on investment. That rationalization process appears to have largely run its course. Most enterprises have now trimmed the fat, leaving behind a core stack of software that is essentially non-discretionary.

The primary fundamental catalyst is the evolution of the software revenue model. We are seeing a move toward consumption-based pricing and the integration of value-added services that justify price increases. Software is no longer just a tool for productivity. It has also become the infrastructure upon which modern business runs. 

This gives the major holdings within the sector significant pricing power. Even in a lukewarm economic environment, companies rarely rip out their core operating systems, database management tools, or security frameworks.

What Do IGV’s Fundamentals and Valuation Tell Us Right Now?

We see here that this is a $12 billion ETF whose portfolio trades at 34x trailing earnings. Still too rich? Not if the death watch for this industry is called off. There are growing signs that this is starting to happen. 

IGV has more than 100 stock holdings, but it fits my criteria for concentration. The top 10 comprise nearly 60% of assets. I prefer that, because I want to know what I own.

The risk to the rosy outlook described above continues to be what it has been. That the broader economic health of the corporate world remains intact. While software is resilient, it is not immune to a systemic downturn that forces even core infrastructure projects to be delayed. 

There’s another “wildcard,” if you will, which might even drive me back to my portfolio-building laboratory. If AI is kryptonite for IGV and software stocks, doesn’t it follow that software stocks should skyrocket if at any point the market decides that AI, as life-changing as it is, will not meet return on investment (ROI) targets? I think so. And as always, I’ll let the charts guide me. 

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.