Software Giants Adobe and Microsoft Hit Decade-Low Valuations Amid AI Anxiety

The software sector is experiencing a sharp divergence from the broader equity market, creating a potential entry point for opportunistic investors. While the S&P 500 remains near record highs, the iShares Expanded Tech-Software Sector ETF (IGV) currently trades 37% below its all-time peak. This decline is largely attributed to market anxiety that generative AI may disrupt high-margin software platforms or replace them entirely. However, operational data suggests that industry leaders are successfully integrating AI into their ecosystems rather than being displaced by it. Adobe (ADBE) has seen its shares drop 46% from their yearly high. Despite this, the company's AI-first annual recurring revenue more than tripled in its fiscal first quarter ending February 27, 2026, with subscription revenue increasing by 13%. The stock currently trades at a forward P/E of 8.5, its lowest level in over ten years. Microsoft (MSFT) has also faced pressure, with shares declining nearly a third since late October. Nevertheless, fiscal second-quarter results showed 15% constant-currency sales growth. Azure, the world's second-largest cloud infrastructure platform, has seen yearly sales growth reaccelerate to nearly 40% following the integration of large language models. With Microsoft trading at a forward P/E of 19.5—approximately 34% below its five-year average—and Adobe at historic lows, the current pricing reflects a stark contrast to the underlying growth in cloud and AI segments.