Valuation Reality: The Software Apocalypse
For years, our fundamental observation in tech investing was straightforward: pure-play software commands a premium. High gross margins, sticky recurring revenue, and hyper-growth meant these companies traded at elevated Price-to-Sales (P/S) multiples compared to their hardware or diversified tech peers.
However, as the latest data from our systems illustrates, that dynamic has fundamentally shifted. We have entered a new valuation reality.
A Tale of Two Trajectories
When analyzing the top pane of the chart comparing the XLK (Technology Select Sector SPDR Fund) and IGV (iShares Expanded Tech-Software Sector ETF), the divergence is striking.
From 2016 through late 2021, broad tech and pure-play software tracked each other relatively closely in our models. But following the 2022 market reset, a significant performance gap emerged. Fueled by the AI infrastructure cycle and semiconductor growth, XLK has achieved a 623% total return over the charted period. Meanwhile, IGV has lagged substantially, sitting at roughly half that return (294%).
The Real Story: The Multiples Crossover
The core of this “Software Apocalypse” is visible in the underlying valuations shown in the bottom pane.
Historically, IGV’s forward P/S (the orange line) floated comfortably above XLK’s (the dark blue line). Software was priced as the luxury tier of the equity market. Over the last two years, I have tracked a vicious multiple compression for SaaS and software names, which collided perfectly with massive multiple expansion for hardware and broad tech.
Today, those lines have officially crossed.
Broad tech (XLK) now commands a higher Next-Twelve-Months Price-to-Sales multiple (7.34x) than pure-play software (7.20x). The market has decisively stripped software of its historic premium.
What’s Driving the Shift?
- The AI Infrastructure Boom: Capital is aggressively flowing to the infrastructure layer of the AI build-out—semiconductors, hardware, and cloud data centers heavily weighted in XLK.
- Software’s AI “Show Me” Phase: While infrastructure is booming, application software companies are currently struggling to prove immediate, scalable monetization from their AI features.
- Macro Pressures: Seat-based software pricing models are facing headwinds from corporate efficiency mandates and slowing headcount growth across enterprise clients.
Under the Hood: Software’s Hidden Divide
When we break down the ETF landscape for funds holding more than a 50% allocation to the GICS Software Industry, the internal rotation becomes even more apparent. It’s not just that software is struggling—it’s which software is struggling.
| Ticker | Fund Name | Group Focus | YTD TR % | YTD Flow ($MM) |
|---|---|---|---|---|
| IGV | iShares Expanded Tech-Software Sector ETF | Broad Software | -25.81% | $1,863.16 |
| WCLD | WisdomTree Cloud Computing Fund | Cloud Computing | -25.36% | -$18.49 |
| XSW | State Street SPDR S&P Software & Services ETF | Broad Software | -22.17% | -$7.00 |
| DAT | ProShares Big Data Refiners ETF | AI & Big Data | -21.44% | – |
| CLOD | Themes Cloud Computing ETF | Cloud Computing | -20.57% | – |
| BUG | Global X Cybersecurity ETF | Cybersecurity | -19.99% | -$4.46 |
| CLOU | Global X Cloud Computing ETF | Cloud Computing | -17.95% | -$17.07 |
| OWNB | Bitwise Bitcoin Standard Corporations ETF | Crypto Adopters | -17.70% | – |
| WCBR | WisdomTree Cybersecurity Fund | Cybersecurity | -15.79% | -$30.60 |
| IHAK | iShares Cybersecurity & Tech ETF | Cybersecurity | -13.42% | -$42.34 |
| HACK | Amplify Cybersecurity ETF | Cybersecurity | -11.36% | -$62.29 |
| PSWD | Xtrackers Cybersecurity Select Equity ETF | Cybersecurity | -10.97% | $0.01 |
| SPAM | Themes Cybersecurity ETF | Cybersecurity | -9.07% | – |
| IBLC | iShares Blockchain and Tech ETF | Blockchain / Digital Assets | -4.84% | -$1.95 |
| STCE | Schwab Crypto Thematic ETF | Blockchain / Digital Assets | -3.99% | $5.07 |
| DAPP | VanEck Digital Transformation ETF | Blockchain / Digital Assets | -3.93% | -$16.50 |
| BITQ | Bitwise Crypto Industry Innovators ETF | Blockchain / Digital Assets | -1.61% | $10.44 |
| BKCH | Global X Blockchain ETF | Blockchain / Digital Assets | 1.52% | -$58.55 |
| MNRS | Grayscale Bitcoin Miners ETF | Crypto Miners | 4.50% | – |
| DECO | SPDR Galaxy Digital Asset Ecosystem ETF | Blockchain / Digital Assets | 10.50% | -$0.63 |
| WGMI | CoinShares Bitcoin Mining ETF | Crypto Miners | 11.60% | -$29.90 |
Two major observations stand out from my analysis of this table:
- The Crypto/Blockchain Lifeline: Because companies like MicroStrategy and major crypto miners are technically classified within the Software industry under GICS definitions, they heavily influence these thematic buckets. While traditional Cloud and SaaS ETFs (WCLD, CLOU, XSW) are deeply in the red (-17% to -25%), the only software-heavy funds posting positive YTD returns are crypto and digital asset plays (WGMI, DECO, MNRS, BKCH).
- Aggressive Dip Buying in IGV: Despite being the worst-performing ETF on this list down nearly 26% YTD, IGV has simultaneously commanded a massive $1.86 billion in inflows. This indicates that while the broader market is rotating away from software, a significant cohort of asset allocators are aggressively trying to catch the falling knife, viewing this multiple compression as a generational buying opportunity.
Visualizing the Damage: Inside IGV
To truly understand the magnitude of this software sell-off, we need to look at the individual components driving IGV’s severe year-to-date decline. The chart below visualizes the YTD returns for every holding in the ETF as of February 24, 2026, with the size of each box scaled by its weight in the fund.
What stands out immediately is the sheer breadth of the drawdown. This isn’t a case of a few speculative, unprofitable names dragging the index lower—the mega-cap anchors of the software ecosystem are swimming in a sea of red. When the largest, most structurally sound companies in a sector undergo this level of synchronized multiple compression, it reinforces just how aggressively the market is universally repricing the “software premium.”
The Bottom Line
The paradigm has shifted. Whether this is a permanent regime change where infrastructure permanently leads, or if software is finally flashing a deep-value buy signal—as evidenced by the staggering inflows into IGV despite its terrible price action—remains to be seen. Either way, our data confirms the current valuation reality: Wall Street is no longer paying a blanket premium for traditional software.
