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AI Anxiety Is Whipping US Software Stocks Around
The S&P 500 software and services index is still down for the year as momentum trading and leveraged ETFs help turn earnings into big daily swings
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2 mins
What’s going on here?
US software stocks are swinging as investors debate which companies AI helps or hurts. Reuters says momentum trading and leveraged products are making earnings reactions feel bigger and faster
What does this mean?
The S&P 500 software and services index has been a roller coaster: after a record high on October 28th, it fell more than 33% by April 10th, then rebounded 33% through a mostly solid first-quarter earnings season. It later slid again and partly recovered during second-quarter reports, but it’s still down more than 3% this year and more than 12% below that October peak. Reuters notes the earlier selling sped up after a January product release by Ant
hropic that some managers feared could make parts of the sector’s offerings obsolete
More of the action is now being driven by “derivative-style” tools like double-leveraged ETFs and same-day options, Themis Trading’s Joe Saluzzi told Reuters. Because these ETFs reset their leverage daily, providers often have to buy or sell the underlying stock at the start of each session to return to target exposure. Morningstar data cited by Reuters shows single-stock leveraged or inverse ETFs jumping to 486 from 28 at the end of 2023, including funds tied to Microsoft and Oracle
Fundamentals still matter: LSEG analyst Tajinder Dhillon told Reuters the group is tracking second-quarter earnings growth of 24.4%, above the 16.4% expected on July 1st. But some advisers argue the market is still separating durable profits from momentum-driven price moves, heading into reports from Salesforce and CrowdStrike on Wednesday afternoon and Oracle in mid-September
Why should I care?
For markets:The jump from 28 to 486 leveraged ETFs can turn earnings into flow-driven gaps
When more trading runs through single-stock leveraged and inverse ETFs, price moves can feed on themselves. After a sharp rise or drop, the funds’ daily reset can force mechanical rebalancing that effectively buys strength or sells weakness, reinforcing momentum. Those swings can also ripple into the options market as market makers adjust their hedges
The result is that software earnings can produce outsized one-day gaps and more expensive option pricing than fundamentals alone would suggest, especially in widely traded names
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