Goldman Sachs signals serious turnaround as software stocks rebound

Software stocks face an increasingly strong calculus Wall Street rethink how artificial intelligence affects the industry.

Goldman Sachs is the last to offer a reality check, suggesting that the software’s calculation is not yet finished, although short selling seems overdone and some investors go bargain basement purchaseincluded Bank of America

In a research note shared with me, Goldman Sachs analysts said Wall Street investors are transforming AIit’s the limitless opportunity for a “show me the money” style mentality.

It’s a big and potentially serious change for the software industry and shareholders.

Where the rubber will hit the proverbial road will be in what happens next to revenue and earnings growth; Software stocks, in particular, may see a significant re-rating of revenue and profit estimates as they come under the crosshairs of agent AI.

Having had a front row seat to the Internet Boom and Bust and paying a hefty tuition in the process, I’ve seen changes like this before. When markets sour on highly valued stocks, the recovery can be long and painful. But it doesn’t happen in a straight line.

Here’s why Goldman Sachs says software stocks are under control, and why Bank of America thinks investors should watch out for four oversold software stocks.

Software stocks soared for years with the growing adoption of hybrid networks and clouds, requiring solutions that could work across silos and a shift to subscription models that provided recurring high-margin revenue predictability.

The rise of AI challenges the idea that businesses and government must rely on many specialized software vendors.

Agentic AI is reshaping Wall Street's outlook for the software industry.A — Agentic AI is reshaping Wall Street’s outlook for the software industry.A · A

Agent AI applications are evolving rapidly and many argue that they will eventually replace many programmers, giving companies more flexibility to build and manage their own software solutions in-house.

The “SaaS Apocalypse”: Software as a Service (SaaS) is historically based on human interaction with interfaces (UI). If AI agents perform tasks via APIs or background processes, the benefits of expensive front-end software subscriptions disappear.
Mercantilization of the characteristics: AI agents can “bring together” simple tools to solve complex problems, eroding the high-value “moats” of specialized software companies.
Switch to “Results as a Service”: If an agent completes a task in seconds that used to take man-hours, companies can no longer justify charging based on “user access” and “per-seat” licensing.

Goldman Sachs sees these risks as a potential existential crisis that could make Wall Street rethink paying for its own software stocks.

“Nearby catalysts for the last leg of the sell-off include Anthropic’s launch of add-ons for its Claude Cowork tool, as well as the launch of Google’s Genie 3 model,” Goldman Sachs analysts wrote in a note shared with TheStreet.

“In recent conversations, investors have focused on both the incremental downside risk to software earnings growth and the existential risk to the industry.”

Two of the most common ways to value software stocks are the price-to-sales ratio and the price-to-earnings ratio. Both have retreated substantially during the sell-off as revenue and profit expectations have remained largely unchanged.

More Wall Street

“Software’s price/sales ratio has declined from 9x in September 2025 to 6x currently,” Goldman Sachs wrote. “Despite this decline, the industry trades at a 260% premium to equal weight S&P 500in line with the historical average”.

The price-to-sales ratio does not suggest that the software is necessarily cheap. However, P/E ratios may indicate an opportunity, assuming Wall Street’s consensus forward estimates do not close.

“Software’s forward P/E multiple has declined from 35x at the end of 2025 to 20x currently, representing the lowest absolute level since 2014 and the smallest premium to the average S&P 500 stock since 2010,” the analysts said.

At 20 times anticipated earningsthe software sector is at its cheapest level in more than a decade.

According to Goldman Sachs, the current forward P/E multiple is more in line with corporate growth 5% to 10% annually, while the industry P/E multiple of 36 last September suggested 15% to 20% growth

This suggests a big disconnect for investors. Either sales and profit estimates will fall substantially, or these stocks are underestimating potential growth.

The pullback has been swift and relentless, and in my experience stocks don’t move in a straight line up or down for long.

Regardless of the final outcome of the AI threat to IT industry and budgets, investors are likely to start dipping their toes into best-of-breed software stocks that may have been wrongly caught in the rout, especially since many institutional managers have already exited.

“Our analysts also see opportunities in some of the stocks caught up in the recent liquidation,” Goldman Sachs wrote. “From a positioning perspective, both hedge funds and mutual funds have recently cut their exposure to software… mutual funds entered 2026 underweight the sector.”

“We expect investors to look for the proverbial babies thrown out with the bathwater,” Goldman Sachs said.

Which stocks could be in line to see a rally first?

Bank of America called for four actions that he believes will pick up:

Snowflake (SNOW): “We see the company as attractively positioned to gain long-term share in the AI data cloud opportunity. Snowflake is helping companies solve a critical problem: making sense of mountains of data.”
MongoDB (MDB): “We think MongoDB’s JSON document database is special … and is shaping the business well as a long-term benefit for new AI workloads and as companies modernize legacy ones.”
Datadog (dog): “What’s being missed is that observability is mission-critical. Even OpenAI, one of the craziest growth stories of the last few decades, spent over a hundred million on Datadog before thinking about moving some of that work in-house.”
JFrog (FROG): “Despite adjacent vendors in the software development ecosystem becoming noisier with new competing products, we believe JFrog is the leader and has a low risk of being displaced anytime soon.”
Source: BofA Global Research report.

Todd Campbell owns shares of the iShares Expanded Tech-Software Sector ETF (VAT) and Snowflake (SNOW).

This story was originally published by The Street on February 7, 2026, where it first appeared in the to invest section Add TheStreet as a Preferred Source by clicking here.

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