AI fears are hitting software stocks the hardest. Citi sees a buying opportunity in many names
Summary
Citi identifies potential buying opportunities in software stocks, which have recently declined due to fears of AI disruption. The firm highlights stocks with earnings momentum that have corrected significantly.
Why It Matters
This analysis sheds light on the current market sentiment surrounding software companies amidst AI advancements. Understanding which stocks may rebound can help investors make informed decisions in a volatile market.
Key Takeaways
- Citi sees potential in software stocks that have corrected over 10% but show improved earnings expectations.
- The iShares Expanded Tech-Software Sector ETF has dropped over 20% in 2026, indicating significant market concern.
- Stocks like Microsoft and Palantir are highlighted as potential rebounds despite recent declines.
Worries over how artificial intelligence may disrupt software companies have shaken up those stocks, and Citi says some of them may be ripe for a rebound. Software stocks have struggled this year as investors fear AI will make "software as a service" business models obsolete. The iShares Expanded Tech-Software Sector ETF (IGV) is down more than 20% for 2026, and has fallen more than 8% in February alone. The software sell-off intensified in early February after AI startup Anthropic launched new tools within its Claude Cowork agent for legal, finance and product marketing matters. After a slight recovery, the stocks again fell after AI disruption fears spread to other sectors throughout the market, including office real estate and wealth management stocks . Citi sees opportunity amid the carnage, though. In a Feb. 9 note, strategists screened the Russell 3000 for software and services stocks with at least $2 billion in market cap. The names had to be down at least 10% over the past month and have 2025, 2026 and 2027 consensus EPS estimates that have been revised higher over the past six months. "We want to focus on names that have corrected, reducing implicit terminal multiples, but have actually seen earnings expectations improve," wrote Citi's U.S. equity strategist Drew Pettit. "Basically, who can still deliver near-term fundamentally, but has been de-risked from an exit multiple perspective medium-term." Because of this, Pettit writes that these stocks are set to go hig...
