TLDR
- Goldman Sachs anticipates the software sector’s recent rally will maintain momentum
- Despite unprecedented short interest in software and IT services, hedge funds are beginning to reverse positions
- The S&P 500 software and services benchmark has plummeted more than 18% year-to-date, eliminating $1.2 trillion in market capitalization
- Technology equities face pressure from concerns that artificial intelligence solutions will displace traditional software offerings
- IBM (IBM) experienced a 13% single-session decline following Anthropic’s introduction of a coding solution aimed at IBM infrastructure
According to a note issued this week by Goldman Sachs’ prime brokerage division, the recent upward momentum in US software and IT services equities appears likely to persist.
The analysis, obtained by Reuters on Thursday, arrives despite hedge fund short interest in these sectors reaching unprecedented levels since Goldman initiated tracking in 2016.
The S&P 500 software and services benchmark has declined more than 18% during the current year. This downturn has erased over $1.2 trillion in market capitalization, based on LSEG figures.
Nevertheless, the index climbed more than 4% during the current week. Goldman analysts believe this upward trajectory has further potential.
Software and IT services represented the most heavily shorted US sectors on Goldman’s prime brokerage platform as of February 24. Simultaneously, long exposure to these industries reached historic lows.
A JPMorgan analysis separately validated that hedge funds initiated purchases of major technology stocks during the previous week, including companies perceived as susceptible to AI-driven displacement.
“While positioning remains very stretched between Semis and Software, the rotation seemed to slow or reverse a bit,” JPMorgan said in its note to clients.
Understanding the Software Sector Selloff
Technology and software equities have faced sustained selling pressure throughout January. The primary concern centers on emerging AI capabilities potentially replacing fundamental software solutions across legal research, software development, marketing automation, and data analytics.
Major players including Salesforce [CRM], Adobe [ADBE], RELX, and MSCI have experienced significant valuation declines during this period.
IBM recorded its steepest single-day loss in a quarter-century on Monday, shedding 13% after Anthropic unveiled its Claude coding platform capable of modernizing legacy programming languages predominantly associated with IBM infrastructure.
The iShares Expanded Tech-Software Sector ETF [IGV] has declined 24% in 2026.
Goldman Sachs additionally noted that hedge fund net equity sales globally reached their highest point since President Trump’s tariff announcement last April.
Financial sector stocks experienced the largest net outflows overall. Conversely, energy, healthcare, and consumer staples sectors attracted the strongest net inflows.
Wall Street Maintains Optimism for Select Holdings
Not every analyst believes artificial intelligence will decimate established software enterprises. Several argue these corporations possess the resources to acquire AI startups or develop proprietary AI capabilities to maintain competitive advantages.
Hedge funds have already expanded RELX holdings by 249,900 shares during the previous quarter and increased Salesforce [CRM] positions by 173,600 shares, according to TipRanks intelligence.
Among tracked equities, analysts project Adobe [ADBE] offers the greatest appreciation potential, targeting $421.52, representing nearly 71% upside.
MSCI carries the most conservative upside projection within the group, with analysts setting a $683 target, indicating approximately 27% potential gains from present valuations.
JPMorgan’s analysis did not identify specific technology stocks attracting hedge fund capital.
Goldman’s prime brokerage established short position monitoring in 2016, rendering current readings the most extreme documented.
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