Short-seller activity targeting software companies has surged to levels not seen since the global financial crisis, according to a Deutsche Bank analysis.
Analyst Parag Thatte said the sector's recent pullback has pushed software stocks "25% below their 200-day moving average," a contraction Thatte described as "worse than the selloffs during the 2022 unwind of Tech and the March 2020 lockdown panic."
Deutsche Bank's data show the median short interest across software firms has climbed "to over 5%, the highest in 17 years," which places the measure in the 93rd percentile across the past two decades. By comparison, short interest during the global financial crisis rose to levels above 9%.
What the bank finds notable
- Historically, the bank says past major selloffs have typically been followed by earnings deterioration within one to two quarters.
- In 2022, software earnings growth declined to zero, while during 2008-09 and 2001-02 software earnings "turned outright negative," according to the analysis.
- Deutsche Bank draws a parallel to the energy sector's 2014 episode, when the sector sold off by 25% and then continued to decline as earnings collapsed over the subsequent 18 months; short interest kept rising until early 2016.
Applying that historical pattern to software, the bank notes that a further sustained decline in the sector would likely require evidence of weakening earnings. Consensus forecasts referenced in the analysis expect growth to decelerate from 26% in the fourth quarter of 2025 to 12% by late 2026, but Thatte also observed that forecasts for 2026 have been rising.
Implications for markets
Deutsche Bank's findings suggest elevated positioning against software stocks at a time when earnings trajectories will be closely watched. The interaction between high short interest and incoming profit reports could shape near-term price action in the sector, while the bank’s historical comparisons underline the link between declines in prices and subsequent earnings outcomes observed in prior selloffs.
Note: The analysis cited here summarizes Deutsche Bank's observations and conclusions as reported by the bank's analyst.