By Joy Wiltermuth

Software stocks and loans have started to find their footing in July, suggesting it may be time for investors to forgive and forget

Software equities and debt have stabilized at prices well above their lows, suggesting the worst for the sector has passed.

Investors may have good reason to avoid the software sector - but some signs suggest the worst has passed, and that it may be time to start showing the group some love.

Software exposure had been the thing for investors to avoid after a treacherous start to the year. The roughly $2 trillion private-credit market has been awash in redemption requests, especially in funds with heavy industry exposure. Leveraged loans, which had helped finance the software boom into late 2025, have tumbled in price. And the iShares Expanded Tech-Software Sector ETF IGV had dropped nearly 40% from its record high in September through its April lows.

With that memory fresh in their minds, investors may remain wary about the sector - but there are signs that, at the very least, bears have backed off. The IGV ETF may be down 13% this year while the S&P 500 index SPX has gained over 9%, but the ETF has held its ground above the $90 level - more than 20% above its April lows - over the past few weeks.

Importantly, the below chart shows that prices for leveraged loans have also found their footing around 91 cents on the dollar, signaling improved confidence in the ability of software companies to repay their debts.

"To start the year, it was just pretty much an everything selloff in all software," said Mike Treacy, head of market risk at Apex Fintech Solutions.

But lately, it's been more about sorting the potential winners from losers in the artificial-intelligence race.

Cybersecurity stocks have been "going crazy in the past three months," Treacy said, on fears of AI-driven cyberattacks. That's helped support the IGV ETF, which has significant exposure to Palo Alto Networks (PANW), a cybersecurity stock that's soared more than 90% over the past three months.

Meanwhile, shares of another IGV constituent, Oracle (ORCL), have lost more than 30% in the past three months and carved out fresh one-year lows in July, underscoring the divide among stocks within the software category.

Anthropic and ChatGPT might mean more competition for companies specialized in "software as a service," like Oracle, but they aren't likely to destroy the entire industry, Treacy said.

And software loan prices suggest a similar narrative. They're well off their 2025 highs, but the supply-demand situation in credit markets has remained fairly balanced. Issuance of new software leveraged loans tumbled in 2026, signaling a skittishness about bank lending in the sector, but also creating less supply for investors to digest.

Meanwhile, U.S. software and services funds have seen $8.1 billion of inflows, or 81.1% of assets, so far this year. That's far more than over the same period in 2025, when the group's net asset value was higher, as the below chart from EPFR liquidity analyst Winston Chua shows.

Software and services funds have seen bigger inflows in 2026, but last year's performance was better.

Net asset value was minus 9.1% from January through July of 2026, versus a 5% increase over the same stretch last year, according to Chua. That reflects this year's tumult in the asset class.

But given the recent stabilization in the sector, there's a good chance that the price performance could change.

"Taking a giant step back," it's too early to discern how the economy and the world of technology will be changing over the next five to 10 years, said George Catrambone, head of fixed income for the Americas at DWS.

"I think it all went a little too far, too fast," Catrambone said of the software selloff, but "it's still a friendly overall credit cycle." That means any deteriorating credit backdrop, a pickup in credit losses or higher yields still could ricochet through private credit or other publicly traded funds.

That could easily upset the stock market's relative calm at the index level. Under the surface, a recent drop in chip stocks landed the benchmark PHLX Semiconductor Index SOX last week in a bear market, defined as a drop of at least 20% from a prior peak.

"I think software is normalizing," said Mark Malek, chief investment officer at Muriel Siebert & Co.

Yet Alphabet's (GOOGL) (GOOG) earnings, on deck for Wednesday, could stir things up as it kicks off a highly anticipated batch of results from the "hyperscalers" of the AI race.

"We are in the calm before the storm," Malek said. He thinks proven software names with solid earnings should be in every tech portfolio, but added they have yet to "emerge from the mud for the average investor to jump back in."

Related: Alphabet is pouring record cash into data centers, and earnings will show whether that's paying off

-Joy Wiltermuth

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07-21-26 1210ET