Here’s why software stocks are finally priced for a comeback and this veteran strategist is buying

Software stocks are being framed as finally priced for a rebound, with veteran strategist Tom Lee buying into the group and arguing the bounce could also reduce private-credit risk. The broader market just posted its best month for the S&P 500 and Nasdaq since 2020, supported by better-than-expected U.S. corporate results and a sharp rally in chip stocks. Mag 7 shares have also recovered to around their start-of-year levels.

Analysis

The important signal is not just a cyclical bounce in software, but a rotation in the market’s tolerance for duration risk. As rates stabilize and mega-cap hardware has already rerated on AI capex, software becomes the next levered expression of improving multiple appetite because its earnings are more sensitive to discount rates than to near-term demand shocks. That creates a second-order tailwind for platform and infra names, while lingering skepticism keeps positioning lighter than in semis — a setup that can sustain outperformance for several weeks if macro volatility stays contained.

For NDAQ specifically, improving software sentiment is a subtle positive even without direct operating exposure: it tends to lift risk appetite for exchange-traded tech baskets, index volume, and new-issue sentiment, all of which support market activity. The more interesting knock-on effect is on private credit and leveraged lenders: if software public comps re-rate, private marks for venture-backed and sponsor-owned software assets improve, reducing covenant pressure and refinancing stress over the next 1-2 quarters. That matters because the weakest balance sheets in the ecosystem are often in software, not hardware, so a broad software rally can ease systemic risk without requiring a full fundamental recovery.

The contrarian risk is that this move can become crowded quickly if investors extrapolate “better-than-feared” earnings into a durable reacceleration. Software still faces a lagging demand reset from earlier budget scrutiny, so any guide-downs or slower net retention in the next earnings cycle would likely hit the group harder than the market is pricing. If the macro backdrop worsens or rates back up 50-75 bps, the re-rating can reverse fast because the sector’s valuation support is mostly multiple-driven rather than purely earnings-driven.

Key Decisions for Investors

• Go long a software basket against semis for 4-8 weeks: long IGV / short SMH, targeting a 5-8% relative move if rate volatility stays muted; stop if 10-year yields back up >50 bps from current levels.
• Add a tactical long in NDAQ for 1-2 months as a vol-and-volume beneficiary of stronger tech risk appetite; use a 3-5% trailing stop because the upside is steadier than direct software beta but the downside is limited.
• Buy 1-2 month calls on high-quality software leaders with net cash and recurring revenue profiles, financed by selling upside in the most crowded AI hardware names; this captures multiple expansion without paying full beta.
• For credit exposure, reduce short-seller risk in private-credit portfolios by trimming the weakest software lenders/issuers into strength over the next quarter; the rally is likely to improve marks before fundamentals fully inflect.
• If software outperformance extends another 2-3 weeks without a pullback, fade the chase with a partial short in the highest-multiple unprofitable software names, because the market may already be pricing in a recovery that will not show up in revenue until later in the year.