Citi Sees Ongoing Volatility in Software ETF Driven by 55% Microsoft Weighting
Citi strategists say the software sector saw significant multiple contraction over the past three years and remains oversold, with Microsoft’s 55% S&P 500 software weighting driving volatility. They keep an overweight stance into Q2, citing a defense of business models in Q1 earnings but predict ongoing price swings.
1. Sector Oversold and Multiple Contraction
Software stocks experienced notable multiple contraction over the last three years, driving the sector into an oversold position by Q4. This contraction has introduced a value component as companies defend their business models against slowing growth.
2. Overweight Stance and Earnings Outlook
Citi strategists maintained an overweight on software into Q2, but plan to revisit this position at end of Q1. They anticipate the upcoming earnings season will see firms actively defend market share, potentially stabilizing prices.
3. Microsoft’s Dominance and AI Idiosyncrasy
Microsoft accounts for roughly 55% of the S&P 500 software industry weighting, meaning its performance heavily influences the broader sector. The expansion of AI features is expected to be idiosyncratic across companies, with many players able to augment offerings and sustain growth.