Momentum, leveraged trading keep software stocks on roller coaster

• Leveraged ETFs have exploded from 28 single-stock products at end of 2023 to 486 currently, with about 63 focused on software companies, amplifying daily price swings through mandatory rebalancing
• Microsoft exemplified the volatility with an eight-session 29% surge following its July 29 earnings, highlighting how momentum trading magnifies sector movements beyond fundamental improvements
• The index remains down more than 3% year-to-date and over 12% below its October record, with investors cautious about AI evolution despite better-than-expected earnings results

Market Summary: Software Sector Volatility Driven by Momentum Trading and Leveraged Products

Key Market Movements:

The S&P 500 software and services index has experienced extreme volatility in 2026, dropping over 33% from its October 28 record high through April 10, followed by a 33% rebound during Q1 earnings season. The index currently sits down more than 3% year-to-date and remains over 12% below its October peak. Microsoft exemplified this volatility with an eight-session, 29% surge following its July 29 earnings release.

Earnings Performance:

Software sector Q2 earnings are tracking significantly ahead of expectations, with aggregated growth of 24.4% versus the 16.4% forecast on July 1, according to LSEG data. Key upcoming reports include Salesforce and CrowdStrike on Wednesday, followed by Oracle in mid-September.

Market Drivers:

Analysts attribute the heightened volatility to three primary factors:

1. Momentum trading strategies capitalizing on price movements
2. Leveraged ETF proliferation – single-stock leveraged/inverse ETFs have exploded from 28 at end-2023 to 486 currently, with approximately 63 focused on software companies
3. Single-day options trading amplifying short-term swings

Daily rebalancing by leveraged ETF providers intensifies price movements, particularly benefiting day traders. Newcomer Corgi Investments recently launched 11 inverse ETFs tied to individual software firms including Microsoft, Oracle, AppLovin, and ServiceNow.

AI Concerns:

The initial January selloff was triggered by an Anthropic product release that raised concerns about potential obsolescence of existing software products. Despite strong earnings, investors remain cautious about AI's evolving impact on the sector's long-term prospects.

Expert Outlook:

While recent results showed "eye-popping" strength, analysts question whether rallies reflect fundamental improvement or momentum-driven speculation, noting significant downside risk if earnings expectations aren't sustained.