Jefferies analyst Desh Peramunetilleke told clients that the decline in U.S. software equities has reached a degree of relative weakness last observed in the wake of the dotcom bust. According to the note, the S&P 500 software sector has lost 20% so far this year and has underperformed the broader S&P 500 index by more than 35% since the end of July 2025.
The firm compared the current relative move to the dotcom period, noting that the previous episode saw the sector’s 12-month underperformance peak at in excess of 40%. Jefferies contrasted that earlier peak with what it described as roughly a 30% 12-month underperformance today.
Peramunetilleke’s note traced the deterioration to a period of weakening that began in August 2025, but highlighted a particularly severe single-day turn on January 29 when the sector fell about 7% in one session. Jefferies said that subsequent waves of negative developments - which the firm cited as including product releases and pessimistic media coverage - have continued to pressure software valuations despite some modest recovery since the sharp drop.
The analyst firm extended the observation beyond the U.S., stating that Japanese software equities are down more than 25% this year, while software stocks across APxJ and developed Europe have declined on the order of 18%.
Jefferies also pointed to pressure in other service-heavy U.S. industries, naming financial services, commercial services and certain consumer sectors as experiencing strain related to AI developments.
On valuation, the note documents a compression in software price-to-earnings multiples from 33 times to 21 times, a level Jefferies says now sits in line with the broader market. Peramunetilleke cautioned that, because of revenue and margin risks, historical valuation premiums for the software sector may no longer be justified and that the sector could even trade at a discount as AI-driven disruption becomes clearer.
Context limitations: The note presents Jefferies’ view and the specific data points cited above; it does not provide additional company-level detail or timelines beyond those figures.