Tech’s Most Hated Trade: Software Stocks Sink, Fear Spikes, and Investors Rush for Crash Insurance

The selling in software stocks has gone from painful to punishing — and now investors are acting like the worst may still be ahead.

After weeks of relentless losses, tech traders are no longer just trimming exposure. They’re buying protection at levels not seen since the depths of the 2020 market panic, bracing for another sharp leg down as artificial intelligence rewrites the industry’s playbook.

On Tuesday, software shares extended their slide for a seventh straight session. The Goldman Sachs software basket is now down 19% for the year, cementing the group’s status as one of 2026’s most battered corners of the market. The weakness spilled into the broader tech complex, dragging the Nasdaq 100 down 1.4% year-to-date.

The fear shows up clearly in the options market. Insurance against a 10% drop in the Invesco QQQ Trust (QQQ) has surged to its most expensive level relative to bullish bets since March 2020, according to Bloomberg data. At the same time, implied volatility in the iShares Expanded Tech-Software ETF has jumped to its highest level since April’s tariff-driven turmoil, sending options premiums soaring.

In short: investors are paying up because they’re scared.

There’s growing concern that this isn’t just a cyclical pullback but a structural reset driven by AI disruption.

“The question is how low do you go?” said Michael Bailey, director of research at FBB Capital Partners. “Investors hate software — that’s pretty clear.”

That sentiment has delivered a harsh reckoning for some of the sector’s biggest names. Microsoft, Oracle, Salesforce, and Palantir have all suffered double-digit declines this year as investors question whether AI-powered tools will undercut traditional software models faster than incumbents can adapt.

Then there’s Adobe, whose roughly 20% year-to-date drop and compressed valuation have turned it into a symbol of what could come next.

“Adobe — is that the canary in the coal mine?” Bailey asked. “Could the entire software sector trade down to that level? If so, watch out below.”

The scale of the damage is staggering. A Goldman Sachs basket of software firms has now shed $2 trillion in market value from last year’s highs — a decline of roughly 30%.

Hedge funds aren’t sticking around to find out where the bottom is. According to Goldman’s prime brokerage data, software is the most net-sold subsector of 2026. Net exposure has collapsed to 4.2%, down from 7% at the start of the year and a historical peak of 17.7% just last week.

Even with many stocks deep into oversold territory, buyers remain scarce.

“Even though software is now in a bear market, no one is stepping in to defend the complex yet,” Goldman’s trading desk wrote in a note to clients. “Buyers continue to beware.”

Part of the problem is that AI has shattered old investing frameworks.

“We are past the stage where you could trade AI as a whole,” said Vishal Vivek, strategist at Citigroup. “You have to start picking your spots.”

The traditional divide between hardware and software is blurring, he said, replaced by more granular battles — memory versus other chip segments, equipment makers versus chip designers, and within software itself, winners versus potential zeroes.

That makes calling a bottom especially dangerous.

“The reality is setting in,” Vivek added, “that we need to find out which of these companies are actually going to outperform and which are going to terminal value.”

One potential inflection point looms later this month. Salesforce’s earnings on Feb. 26 could serve as a crucial test for battered sentiment. A strong report might pause the rout — or even spark a short-term rebound.

But even a beat may not be enough to calm nerves for long.

For now, software has become tech’s most unloved trade — a sector where fear is expensive, conviction is scarce, and the biggest question haunting investors is no longer when to buy, but whether some of these companies will ever recover at all.