Why Software Stocks Remain Risky

  • Software stocks are down significantly this year.
  • High-interest rates, slowing growth, and year-end tax selling could be stiff headwinds to overcome.
  • Patiently waiting for the additional conviction that the worst is behind these stocks is smart.

A widespread shift in the industry’s business model to software-as-a-service subscriptions has helped software stocks perform remarkably well following the stock market’s COVID-era lows.

However, the industry is among the worst-performing groups this year.

Rising interest rates have forced valuation models to devalue forward earnings, a strong US Dollar is limiting overseas growth, and a global recession is shrinking IT budgets. As a result, The iShares Expanded Tech-Software Sector ETF 🇧🇷IGV🇧🇷 and the Global X Cloud Computing ETF 🇧🇷CLOU🇧🇷 are down 34% and 41% in 2022.

Recently, inflation has moderated from its peak in June, sparking hope the Federal Reserve will stop aggressively increasing rates, allowing software stocks to rally. Unfortunately, the industry faces stiff headwinds, so optimism may be premature.

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