AI panic is referred to as "emotion killing," and the bear market Barry loudly flipped! US software stocks violently rebounded.

After experiencing months of continuous decline and historic valuation compression in 2026, the US stock market's cybersecurity and enterprise software sectors saw a strong rebound last week, successfully riding on the market's recovery momentum. The Dow Jones Industrial Average and the S&P 500 Index have recovered all the losses suffered due to the US-Iran conflict. As extreme pessimism about "AI disrupting everything" begins to dissipate, Wall Street is reassessing the long-term impact of artificial intelligence (AI) on this industry, with several prominent investors and analysts shifting their views on the software sector from pessimistic to optimistic. The Scissors Gap between Sentiment and Fundamentals The previous continuous selling was fueled by market concerns about the deep disruption of traditional software business models by AI-native companies (like Anthropic and OpenAI). Investors worried that AI would permanently weaken enterprise software pricing power, revenue growth, and profit margins, thus eroding the industry's long-standing high valuation premiums. However, this disruptive risk is more reflective of market sentiment than company financial data. Moreover, due to the previous sell-off, valuations have been significantly reduced, presenting some investors with a buying opportunity. Data shows that while the Global X Cybersecurity ETF (BUG.US) has recorded about a 12% decline year-to-date, it saw a weekly increase of 12% last week; similarly, the First Trust Nasdaq Cybersecurity ETF (CIBR.US) also recorded a 9% weekly increase. This drastic reversal highlights that the sector's previous challenges were not performance-related but extreme sentiment suppression. Driving the influx of funds is not only cheap valuations but also marginal improvements in profit expectations. Industry research data shows that Wall Street analysts have quietly raised expectations for the software sector, expecting a 16.5% profit growth for software and services companies in 2027, up from the previously forecasted 15.7% at the end of February. Revenue expectations also show a similar upward trajectory. Christian Magoon, CEO of Amplify ETFs, describes this phenomenon as being "victimized by AI-related news." He points out, "The main reason for the drop in software stocks is that investors are shifting funds to AI infrastructure and semiconductor fields. Cybersecurity stocks, despite continued growth in fundamentals, have not benefited from this." This is particularly evident in the divergence between valuations and performance of top stocks. Data shows that after a nearly 20% decline year-to-date, tech giant Microsoft Corporation's (MSFT.US) stock price surged by 13% last week. Following Piper Sandler's analyst Rob Owens reiterating a "hold" rating on Palo Alto Networks (PANW.US), the stock rose by 7% in a single day, though its year-to-date decline remains close to 6%. Other similar companies like CrowdStrike (CRWD.US) also show a similar deep V-shaped trend. Magoon states that AI has indeed brought opportunities and uncertainties to the cybersecurity industry, increasing demand while also introducing new competition. Institutional and major investors change their stance, signaling a logic of contrarian investment: from "crowded effect" to "positive feedback loop" Market sentiment indicators have also reversed. With sector valuations falling, Wall Street's pessimistic narrative is starting to break down. Jefferies Financial Group Inc. tech analyst Brent Thill explicitly stated that the software sector's worst period may be behind it. "The notion that the software industry is dead, and that Anthropic and OpenAI will kill the entire industry, is exaggerated," Thill said. More significantly, famous investor and prototype of "The Big Short," Michael Burry, has also changed his view following the recent sell-off. Burry wrote last Wednesday, "Due to the sharp decline in software stocks recently and the positive feedback loop between the decline in software stocks and changes in the corporate debt markets, software stocks are still worth watching." Burry pointed out in his analysis that the sharp decline in stock prices is forming a "positive feedback loop" with changes in the corporate debt market. The logic behind this professional term is that a sharp drop in stock prices triggers convertible bond terms or insufficient credit collateral, leading to technical selling by creditors, further causing an irrational decline in stock prices. Burry is focusing on this forced deleveraging chain, anticipating an extreme bottom once the chips have been cleared. Senior strategist Ed Yardeni also stated that US tech stocks, after falling from last year's historic highs, have reached attractive levels for investors willing to make long-term investments. Bill Baruch, head of Blue Line Capital, also emphasized that software stocks have been "wronged," with attractive targets like ServiceNow (NOW.US), Oracle Corporation (ORCL.US), and Microsoft Corporation. He has already deployed half of his cash reserves to increase positions in the software sector. Furthermore, Wall Street investment banks have published bullish views through research reports. Goldman Sachs Group, Inc. strategist Peter Oppenheimer explicitly stated that the tech sector's pullback constitutes a "value opportunity," pointing out that the global tech stocks' forward PEG ratio has fallen below 1, and the rolling PEG indicator is at a low point since 2005. Analysts continue to revise upwards profit expectations for 2026 and 2027, with high return on net assets supporting current valuation levels. Wells Fargo & Company also believes that information technology stocks are at attractive valuations for investors. Wells Fargo & Company's investment research arm has upgraded its rating on the sector from "neutral" to "bullish," citing the sector's underperformance compared to the S&P 500 Index and the widespread application of artificial intelligence supporting its robust growth prospects. Market analysis suggests that the significant valuation pullback not only brings some SaaS companies' price-to-sales ratios to lows but also may rekindle leveraged buyout (LBO) activity in the private equity market. Additionally, to counter new network threats brought by AI, major tech companies are expected to increase mergers and acquisitions activities in the security field, directly benefiting the sector's stock price support. Magoon further adds, "Once the stock prices of certain industries drop by more than 10%, contrarian investors will start entering. In an AI-driven world, threats faced by enterprises may actually stimulate an increase in mergers and acquisitions activities in the cybersecurity field, providing potential support for stock prices." Alarm not lifted: Long-term positioning under the midterm election curse Despite the rapid short-term rebound, Wall Street remains cautious about blindly chasing highs. Thill admits that investors currently tend to "underweight" software stocks, while Magoon issues a more explicit macro warning. Magoon cites historical data to point out that as a midterm election year, 2026 often comes with significant market declines and high volatility. "If you think things are bad now, they could get even worse," Magoon warns. However, Magoon also notes that for patient investors, this cyclical decline also presents opportunities. According to historical patterns, after the pullback triggered by midterm elections ends, the market often sees very strong 12-month returns. For investors holding cash waiting to enter the market, Magoon refers to Bank of America Corp data, providing an observation path based on historical statistics: the best performers are often the contrarian targets with the least buying interest in the early stages of the decline. He mentions that last year, institutional holdings in energy stocks were at multi-year lows, and subsequent reverse sentiment indicators validated their explosiveness. However, the application of this logic to the software sector requires a longer time dimension. Currently, while some analysts (like Thill) still recommend that investors "underweight" severely affected software stocks and look for marginal opportunities, Magoon suggests that for investors with longer investment horizons and no need for short-term liquidity, closely monitoring high-quality niche markets during the current market downturn and "staying the course" will be key to capturing future recovery dividends.