Why is the software sector performing so much worse than the S&P 500? The last time was during the internet bubble burst.

Investing.com - According to Jefferies analyst Desh Peramunetilleke, the sharp decline in U.S. software stocks has reached levels not seen since the dot-com bubble burst.

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In a report to clients dated January 31, 2025, the analyst noted that the S&P 500 software sector has fallen 20% this year, “lagging the broader market index by more than 35% since late July 2025.”

Jefferies explained, “The last time the software sector lagged the S&P 500 so significantly was during the dot-com bubble burst,” when the sector’s 12-month lag peaked at over 40%, compared to about 30% now.

This decline has recently accelerated. Peramunetilleke wrote that the sector has been weakening since August 2025, but “the largest drop occurred on January 29, with a single-day decline of about 7%.”

Jefferies added that subsequent “negative news (Claude release, doomsday articles)” continued to pressure valuations, despite a mild rebound.

Jefferies emphasized that Japanese software stocks have fallen over 25% this year, while software stocks in Asia-Pacific (excluding Japan) and developed European markets have declined about 18%.

In the U.S., other service-intensive industries, including financial services, business services, and some consumer sectors, have also come under pressure related to AI.

Jefferies noted that the valuation of the software sector has compressed from a P/E ratio of 33 to 21, now matching the broader market.

However, Peramunetilleke warned that “given revenue/margin risks, past valuation premiums may no longer be justified,” and added that as AI-driven disruption becomes more apparent, the sector “may even trade at a discount.”

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