US software and IT services stocks could continue their recent rebound despite heavy bearish positioning from hedge funds, according to a prime brokerage note from Goldman Sachs. The report indicates that the sector, which has faced significant selling pressure this year, may be poised for further upside as short positions reach historic highs.
The S and P 500 software and services index has declined more than 18 percent so far in 2026, erasing over one trillion dollars in market value. The drawdown reflected investor concerns about stretched valuations, slowing enterprise spending, and shifting expectations around artificial intelligence monetization. However, the index rebounded more than 4 percent this week, suggesting that selling momentum may be stabilizing.
Goldman Sachs prime brokerage data shows that software and IT services were the two most shorted industries in the United States as of February 24. Short interest has climbed to the highest level recorded since the bank began tracking hedge fund positioning in 2016. At the same time, long positions in the sector have fallen to record lows, indicating limited bullish conviction among institutional traders.
Such extreme positioning can create the conditions for a short squeeze, where investors who have bet against stocks are forced to buy shares to cover losses if prices rise. This dynamic can amplify upward moves, particularly in sectors with high liquidity and strong retail participation.
The broader equity backdrop also supports the potential for further gains. The US labor market remains stable, and expectations that the Federal Reserve will keep interest rates elevated for longer have shifted focus toward earnings resilience rather than rapid policy easing. For technology stocks, stable rates combined with selective growth opportunities in cloud computing and AI infrastructure could improve sentiment.
Artificial intelligence remains a central theme in the sector’s outlook. While some companies have struggled to translate AI investment into immediate revenue growth, others are benefiting from enterprise adoption of automation and data analytics tools. Investors are increasingly distinguishing between firms with scalable AI driven revenue streams and those facing margin pressure from rising research and development costs.
Valuation adjustments earlier in the year may also make certain software names more attractive relative to historical multiples. After a sharp correction, price to earnings ratios across parts of the sector have moved closer to long term averages, potentially drawing back institutional capital seeking growth exposure.
Currency dynamics could also play a role. A stronger US dollar has pressured multinational earnings across sectors, including technology. However, if dollar strength stabilizes, revenue headwinds from overseas markets may ease, offering additional support to large cap software companies.
Market participants will be watching upcoming earnings updates and forward guidance closely. Corporate commentary on demand trends, enterprise budgets, and AI related capital expenditure will likely determine whether the rebound broadens or remains tactical.
With hedge funds heavily positioned on the short side and long exposure near record lows, even modest positive catalysts could drive continued volatility and extend the recovery in US software stocks.
