Software stocks enter a "brutal liquidation period"! $2 trillion market value evaporates, hedging costs soar to highest level since 2020.

Notice that the continuous sell-off of software stocks has made tech investors increasingly anxious, to the point where they are starting to pay premiums to purchase hedging tools to prevent a sharp decline in stock prices. This concern is not without reason. On Wednesday, software stocks once again plummeted, with the Goldman Sachs Group, Inc. software basket recording its seventh consecutive trading day of decline, bringing its year-to-date decline to 19% in 2026. This rout spread to a broader range of tech sector indexes, dragging the Nasdaq 100 index down by 1.4% year-to-date in 2026. Data shows that this uncertainty has led to a surge in insurance costs (relative to bullish bets) for the Invesco QQQ Trust Series 1 ETF (QQQ.US), with a 10% drop, to the highest level since March 2020. At the same time, the implied volatility of the iShares Expanded Tech-Software Sector ETF (IGV.US) is at its highest point since the tariff turmoil of April last year, pushing up option premiums. Although there are signs that the sell-off may be overdone, the volatility brought by AI applications to the industry is so severe that predicting the bottom has become an extremely difficult task. The iShares Software ETF implied volatility spikes "The question is, how low will it go?" said Michael Bailey, head of research at wealth management firm FBB Capital Partners. "Investors are turning against software stocks, that much is clear." For industry giants, this means a brutal reckoning, particularly for companies like Microsoft Corporation, Oracle Corporation, Salesforce, Inc., and Palantir. As investors increasingly worry that AI tools will disrupt their businesses, the stock prices of these companies have all seen double-digit declines this year. Risk-averse sentiment continued on Thursday, with U.S. stock index futures continuing to decline before the stock market opens. Tech stock hedging indicator reaches highest level since March 2020 Additionally, Adobe's valuation falling to the bottom and its 20% price drop this year are seen as omens for the sector's outlook. "Is Adobe the 'canary in the coal mine'?" Bailey said. "Will the entire software sector fall to that level? If it does, watch out below. That's a significant risk." While hedging insurance against such a scenario could mitigate the impact, Citigroup strategist Vishal Vivek says the best approach is to distinguish between winners and losers. "We have gone through a phase where we could trade AI as a whole, now we must start picking specific points of entry," he said. The traditional opposition between hardware and software is breaking down, to the point where it's no longer a battle between hardware and software, but rather differences within hardware storage, other components, semiconductor equipment, and chip manufacturers. Currently, investors do not seem to demonstrate this discernment. A basket of software companies under the Goldman Sachs Group, Inc. has evaporated $2 trillion in market cap from its high point last year, a decline of about 30%. Hedge funds are also unwinding. According to data from Goldman Sachs Group, Inc.'s prime brokerage division, software is the most sold subsector so far this year. The net exposure of the software sector dropped to a historical low of 4.2%, compared to 7% at the beginning of 2026 and a peak of 17.7% (last week's data). In a report to clients, the trading department wrote, "Although software stocks are currently in a bear market and entering oversold territory, no one has stepped in to support the market yet, buyers remain cautious." Bailey said that Salesforce's earnings report scheduled for February 26 will be a key test. If this enterprise software giant's performance exceeds expectations, it may not bring a reversal, but at least it could mark the end of this rout. Even if Salesforce performs well, there remains a question: AI may pose a survival threat to certain software companies. Vivek said, "The reality is becoming clearer: we need to figure out which companies can actually perform well, and which companies will reach their end valuation (either through liquidation or decline)."