Cybersecurity and software stocks have had a terrible start to the year due to fears of AI disruption amid high valuations, but they surged last week. This also touches on aspects of portfolio.

With enterprise software stocks as blue-chip as Microsoft down close to 20%, there’s a classic opportunity hunt underway among investors.

But election years are volatile throughout sector history and any risk-taking sending investors back into beaten-up tech names comes amid conditions where a broader stock correction could still be ahead and valuations are not necessarily cheap.

Cybersecurity and enterprise software stocks have been industry dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader economy rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.

Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, commented on this week’s “ETF Edge.”

It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.

A huge driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon commented, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.

But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, remarked last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he remarked on CNBC’s “Money Movers” on Wednesday.

“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the marketplace for their bank debt,” he wrote.

The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.

Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.

Magoon remarked expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.

“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon mentioned.

He commented AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing latest competition. But he added, “I think the dip is favorable to purchase in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.

For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill noted.

But Magoon advises investors to at least take the reminder to keep an eye on niches in the sector during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he remarked.

While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.

Meanwhile, this year’s biggest winner is also a superb example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon stated, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said. 

But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the marketplace yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is adverse right now, it could get a lot worse,” Magoon stated. But he added that there’s a silver-lining in that data, too, for the patient investor. The marketplace has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon remarked, “stick in there.” 

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