MW It's been a software horror show. Here's why it could get even scarier, according to Citi.

By Jamie Chisholm

A short term bounce may be due for software, but longer term problems remain

A Scream on Friday 13th as software stocks remain under pressure

It's Friday the 13th, and investors will be hoping the software horror show will soon end.

Fears that artificial intelligence products will butcher the business models of software-as-a-service companies has caused savage selling in their stocks.

The iShares Expanded Tech-Software Sector exchange traded fund IGV is now down 31% from its record high touched in September, with much of the damage done in the last few weeks.

Like teens in a creepy house the software sub-sectors are being taken out methodically, one by one.

The good news, from Scott Chronert, head of U.S. equity strategy at Citigroup, is that the sector is due a bounce. "We anticipate some short-term reprieve from the recent selling barrage," he says in a video distributed Thursday.

A recent surge in trading volumes for software ETFs points to a "selling crescendo" says Chronert, and this means on a shorter-term basis "a bottom has likely been felt among the software industry group."

However, Chronert also thinks there's great danger of further losses in the longer term for the software sector.

He admits Citi went into 2026 with an overweight stance for technology, driven by an over-weighting in semiconductors and software, and an equal-weighting on tech hardware.

But now software is struggling as "the market begins to look at the terminal values for this part of the market," he says. Terminal value represents the estimated value of a business assuming it will continue to grow at a stable, constant rate indefinitely. It is a major component of discounted cash-flow analysis.

The shift is not because of any current or imminent deterioration in business fundamentals. In the fourth quarter reporting season the software companies have delivered on expectations, and indeed earnings guidance for this year and next have in aggregate moved higher, Chronert stresses.

What the recent selling pressure indicates says Chronert is the "emerging theme that amidst the AI boom we're also starting to see more concerns about AI disruption on existing business models" over the longer term.

Investors are therefore asking themselves what these companies will look like 3, 5 or 10 years from now, and are adjusting their discounted cash-flow models to reflect this uncertainty.

Chronert estimates that at least a 10% reduction in terminal value for these companies has been priced in. However, a 20% reduction in terminal values has not yet been priced in, as the chart below indicates.

Source: Citigroup.

Should a 30% reduction to terminal values be applied, then that would take the sector back to levels seen in 2023.

The market has already started compressing other valuation measures of software, such as enterprise value to sales or forward earnings per share multiples, Chronert notes. These contractions have left the software sector at its relative lowest valuation to the broader market in several years.

Chronert says this sets the market up for much more idiosyncratic behavior as investors strive to distinguish between companies most impacted by AI and those that may maintain a competitive edge.

"All told...[the] longer term issue in our view is one of terminal value contraction, shorter term we think a bottom is in place, and in between we're looking for increased scrutiny in terms of stock selection within the category as we move forward from here," says Chronert.

This all aligns with Citi's view for 2026, he adds, which will contain periods of volatility amidst a still "very constructive backdrop...in terms of the price action for U.S. equities."

The markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is up, while oil prices (CL.1) rose, and gold futures (GC00) are trading around $4,990 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6832.76    0.51%   -1.61%  -0.19%  11.74% 
   Nasdaq Composite                                                     22,597.15  0.25%   -3.96%  -2.77%  13.29% 
   10-year Treasury                                                     4.124      -9.30   -10.30  -4.80   -35.60 
   Gold                                                                 4991.1     0.05%   8.48%   15.21%  72.48% 
   Oil                                                                  63.11      -0.61%  6.57%   9.93%   -10.57% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. economic data due Friday include the consumer price index for January.

Applied Materials shares (AMAT) are jumping after the company forecast strong growth in semiconductor-equipment revenue this year.

Goldman Sachs' $(GS)$ top lawyer Kathy Ruemmler is to resign after emails showed close ties to Jeffrey Epstein.

President Donald Trump is considering rolling back tariffs on metal and aluminum goods, according to a report.

Companies reporting earnings on Friday include Moderna (MRNA) and Cameco $(CCJ)$.

U.S. markets will be closed on Monday for Presidents' Day.

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The chart

Source: Strategas Securities

"Despite broader concerns around market valuations, our data on the percentage of Russell 3000 companies trading at 10x price-to-sales does not currently raise red flags," say Ryan Grabinsky and Jon Byrne at Strategas Securities. "At 7.1%, the reading is among the lowest levels observed in the post-COVID period. That said, it is worth noting that this metric offered limited signal in the run-up to the financial crisis, so we remain mindful of its limitations," they add.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   INFY    Infosys 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   MU      Micron Technology 

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February 13, 2026 06:26 ET (11:26 GMT)

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