Software & Services is in a bear market as markets price in the risk of AI-driven disruption to existing business models. Yet the de-rating has been driven entirely by price rather than earnings revisions, with forward 12-month EPS estimates for the industry at an all-time high.
The group is the worst-performing industry within the S&P 500 year-to-date, down 19.0%, and has declined 26.8% from its 52-week high. The drawdown has been broad-based: the median company in the group is down 37.6% from its peak.
The weakness has been concentrated in Application Software (-28.1% drawdown) and Systems Software (-25.6%), which together represent 22 of the 30 constituents in the industry and includes Microsoft, which represents roughly 55% of the industry market-cap weight.
StarMine’s Analyst Revision Model (ARM) reinforces the divergence between price and analyst sentiment. 17 of the 30 constituents in the group trigger a bullish sentiment with ARM scores above 70 (on a 1–100 scale, where 100 is most bullish), while only three names register bearish signals (a score below 30). Revision breadth remains positive in Systems and Application Software, while Internet Services & Infrastructure stands out as the only sub-industry where every constituent has seen a decline in ARM score over the last 90 days.
When disaggregating the group into two buckets, companies with bullish ARM scores have seen FY2026 EPS estimates increase by an average of 3.4% (median +1.8%). In contrast, the bearish cohort has seen estimates decline by 2.1% on average (median -2.7%) – modest relative to the magnitude of the price reaction.
This raises an important question: has the sell-off overshot fundamentals, or are analysts not recalibrating forecasts quickly enough in the face of structural AI-related uncertainty? One possible interpretation is that markets are discounting potential future guidance cuts before they are reflected in consensus estimates.
For now, the divergence has translated into meaningful multiple compression. The average forward P/E across the group has fallen 25% since the sector peaked in late October 2025, declining from 32.6x to 22.7x. The industry now trades at its smallest premium to the S&P 500 since 2013.
Notably, this valuation reset has occurred even as forward fundamentals remain intact. Analysts forecast 13.4% earnings growth in 2026 for the industry, alongside 12.9% revenue growth and a 29.3% net margin, according to the latest S&P 500 Earnings Scorecard.
Prior Editions of the StarMine Spotlight:
(#005): SanDisk Earnings Preview: Parabolic Growth Expectations Viewed Through A StarMine Intrinsic Value Lens – Jan 28. 2026
(#004): Magnificent-7 Earnings Preview: Growth Slows, StarMine Signals Declining Sentiment – Jan 27. 2026
(#003): StarMine Flags Credit Rating Divergence Amid Oracle’s AI Push – Dec 9. 2025
#002: StarMine Flags Strong Analyst Sentiment Ahead of Nvidia Earnings – Nov 18. 2025
#001: Meta’s Spending Spree – StarMine Signals $105 Billion CapEx by 2026 – Nov 5. 2025
