Momentum, leveraged trading keep software stocks on roller coaster

U.S. software shares experienced significant volatility in recent months, driven by AI-driven uncertainty and the rise of leveraged trading strategies, according to wire material. After reaching a record high in October, the S&P 500 software and services index plummeted over 33% by April, with selling accelerating following Anthropic's January product release that some managers feared would make many products obsolete.

The index rebounded 33% during the first quarter and again in the second quarter before falling more than 3% for the year and 12% below its October peak. Investors closely await quarterly reports from Salesforce and CrowdStrike on Wednesday, followed by Oracle in mid-September. Momentum trading and leveraged funds, which can amplify daily moves, have amplified these swings.

Analysts note that while positive earnings may have contributed to the summer bounce, it is unclear how much resulted from improving fundamentals versus trader bets on continued momentum. Leveraged ETFs, which aim to double or triple daily returns or losses, have surged in popularity, with over 486 single-stock products now available.

However, some investors remain cautious about the sector's long-term outlook as AI technology evolves, as current prices reflect past earnings and an expectation of continued earnings growth.