Software Stocks Plunge Amid Market Concerns
Written by Emily J. Thompson, Senior Investment Analyst
Updated: Jan 31 2026
0mins
Source: Fool
- Software Stock Decline: In January 2026, the iShares Expanded Tech-Software Sector ETF fell 16%, with major software companies like Microsoft, Palantir, and ServiceNow experiencing significant price drops, indicating market concerns about the future of the software sector.
- AI Disruption Fears: Investor anxiety over AI tools potentially replacing enterprise software has intensified, leading to decreased confidence in these companies, even as they continue to report solid growth figures and guidance.
- Valuation Pressures: ServiceNow's stock has plummeted 50% from its peak in late 2024, yet it still trades at a P/E ratio of 70, highlighting the valuation bubble in the software sector, while Palantir's price-to-sales ratio stands at 99 and P/E at 353.
- Investment Opportunities: Although short-term market fluctuations are unpredictable, high-quality software stocks like Microsoft, bolstered by its robust Azure cloud computing business, are viewed as attractive investments, currently down 23% from last year's peak.
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Analyst Views on MSFT
Wall Street analysts forecast MSFT stock price to rise
34 Analyst Rating
32 Buy
2 Hold
0 Sell
Strong Buy
Current: 419.090
Low
500.00
Averages
631.36
High
678.00
Current: 419.090
Low
500.00
Averages
631.36
High
678.00
About MSFT
Microsoft Corporation is a technology company. The Company develops and supports software, services, devices, and solutions. The Company’s segments include Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services. This segment primarily comprises: Office Commercial, Office Consumer, LinkedIn, and Dynamics business solutions. The Intelligent Cloud segment consists of server products and cloud services, including Azure and other cloud services, SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (CALs), and Nuance and GitHub; and Enterprise Services, including enterprise support services, industry solutions and Nuance professional services. The More Personal Computing segment primarily comprises Windows, Devices, Gaming, and search and news advertising.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
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- Philanthropic Commitment: The foundation aims to spend its entire endowment by 2045, planning to allocate over $200 billion over the next two decades, necessitating the liquidation of its investments to meet this goal.
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- Investment Outlook: Microsoft maintains a strong competitive moat, and its current valuation metrics have become more appealing, leading analysts to suggest that now may be a good time to establish a position, as long-term holding remains a viable strategy.
See More
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- Data Diversity Enhancement: Microsoft purchased over 20 million minutes of multimodal data from nonprofit Be My Eyes to improve AI representation of blind individuals, ensuring generated imagery reflects societal diversity and inclusivity.
- AI and Employment: Despite cutting approximately 15,000 jobs in 2025, Lay-Flurrie notes that AI technology is providing opportunities for marginalized workers, particularly those who are neurodiverse and disabled, enhancing their independence and efficiency in the workplace.
- Feedback and Iteration: Lay-Flurrie emphasizes that continuous feedback and rapid iteration are crucial for improving AI technology, with Microsoft optimizing its products by listening to user feedback to ensure sustainability and adaptability of its technology.
See More
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- Significant Technological Edge: Cerebras' Wafer Scale Engine 3 (WSE-3) claims to offer 250 times more on-chip memory and 2,625 times more memory bandwidth than Nvidia's B200 package, which could fundamentally alter the landscape of AI processing if widely adopted.
- Major Partnership Agreement: OpenAI has signed a $20 billion multi-year compute capacity agreement with Cerebras, securing up to 750 megawatts of specialized AI infrastructure power and potentially acquiring an 11% equity stake in the company, indicating strong market validation of its technology.
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See More
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- Technological Innovation Potential: Cerebras' new wafer technology claims to be more efficient than Nvidia's, with its Wafer Scale Engine 3 offering 250 times more on-chip memory and 2,625 times more memory bandwidth, potentially reshaping the AI processing landscape, although its long-term impact remains uncertain.
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- Strategic Partnership Opportunity: OpenAI has signed a $20 billion multi-year compute capacity agreement with Cerebras, securing 750 megawatts of AI infrastructure power, showcasing Cerebras' potential influence in the AI sector, even as it faces fierce competition from Nvidia.
See More
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- Microsoft Investment Opportunity: Following an over 18% drop in Microsoft's stock due to concerns over slowing cloud growth and surging AI infrastructure spending, Ackman began accumulating Microsoft shares in February 2026, ultimately building a core position of approximately 5.6 million shares, demonstrating confidence in Microsoft's long-term growth potential.
- Market Reaction Analysis: Despite market concerns regarding Microsoft's spending and return on investment speed, Ackman viewed the market's reaction as overly pessimistic, choosing to invest when Microsoft's forward P/E ratios were between 20 and 23, showcasing his value investment strategy.
- Future Outlook: Although Microsoft's stock is down about 23% from its all-time high, analysts have set an average 12-month price target of $560, approximately 34% higher than current trading levels, indicating that Ackman's investment remains attractive and suitable for patient long-term investors.
See More
