Investment Rating - The report indicates that the software industry is currently in a bear market, with significant declines in market capitalization and net exposure [1][2]. Core Insights - The software sector has experienced a substantial sell-off, with the Broad Software Basket (GSTMTSFT) losing $2 trillion in value, approximately a 30% drop from its highs [1][5]. - Despite the decline in valuations, the software industry still trades at a 260% premium to the equal-weight S&P 500, consistent with historical averages [6][7]. - Consensus estimates predict a two-year forward revenue growth of 15% for software, which is more than double the 6% revenue growth expected for the median S&P stock [6][7]. Summary by Sections Software Market Performance - The software sector has faced fears of disruption from AI, leading to a significant drop in stock prices, with software stocks down 15% this week alone [5][9]. - The net exposure of software as a percentage of total US net market value has reached a record low of 4.2%, down from 7% at the beginning of 2026 and a historical peak of 17.7% [1][2]. Valuation and Growth Prospects - The price/sales ratio for software has decreased from 9x in September 2025 to 6x currently, indicating a sharp decline in valuations [6][7]. - There are signs of stabilization in leading indicators after four years of worsening trends, suggesting potential benefits from increased enterprise AI investment [14]. Industry Dynamics and Future Outlook - The report highlights a shift in AI project implementations from bespoke custom builds to packaged software offerings as the ecosystem matures [15]. - Evidence of pricing power is emerging as the push for adoption begins to convert into monetization, allowing companies to pass on incremental costs to customers [16]. - The report anticipates that it may take 2-3 quarters of stable fundamentals for investor sentiment to improve, with potential for a recovery in the software sector [9][14].