Short-sellers have reaped approximately $24 billion in profits as software stocks tumbled during the first six weeks of 2026, according to data analytics firm S3 Partners. The windfall comes amid a broad market rotation away from technology stocks that has intensified pressure on previously high-flying AI plays and major software companies.
The sharp decline in software stocks accelerated this week, though many prominent technology names have struggled throughout the year facing both company-specific challenges and broader macroeconomic headwinds. According to S3 Partners, the software sector has lost roughly $1 trillion in market capitalization year-to-date as investors continue rotating away from tech.
Short-Sellers Increase Bearish Positions on Software Stocks
Data from S3 Partners reveals that short-sellers have been betting against major software companies throughout the year, but have significantly increased their bearish positions recently as market conditions shifted and volatility surged. The firm noted that while short interest in the overall Magnificent 7 stocks and the Invesco QQQ ETF has remained relatively flat, hedge funds have specifically targeted software stocks with growing conviction.
Microsoft stands out among the software stocks facing increased short-seller activity, according to the report. The tech giant has experienced unusual trading patterns as its stock price has declined sharply this year, with short-sellers behaving differently than historical norms would suggest.
Microsoft Trading Pattern Signals Shift in Sentiment
S3 Partners highlighted that Microsoft historically traded as a reversal stock, with short-sellers typically covering their positions as the stock declined. However, the firm now characterizes Microsoft as trading like a momentum-driven, distressed name, with short-sellers actually increasing their positions into weakness rather than taking profits.
This shift in short-seller behavior around software stocks reflects intensifying scrutiny of the artificial intelligence trade that has dominated market narratives in recent years. The rotation away from AI-focused investments has created opportunities for bearish traders to profit from declining valuations in the sector.
Contagion Spreads Across Technology Sector
Additionally, S3 Partners noted that the bearish sentiment is spreading beyond pure software plays to other large-cap technology companies. Broadcom has seen short interest increase by 15 percent while Amazon experienced a 10 percent rise in short positions, according to the data firm. Broadcom shares have declined 10 percent year-to-date as the contagion effect becomes visible across short books.
The firm maintains that hedge funds continue focusing on expanding their short positions in large-cap technology stocks, even though many sector leaders have already posted significant declines from previous highs. This suggests that professional investors believe further downside remains for software stocks despite the substantial losses already recorded.
Meanwhile, the concentration of short-selling activity specifically in software stocks, rather than technology broadly, indicates that investors are making targeted bets against companies they view as particularly vulnerable. The divergence between flat short interest in broader tech indices and surging bets against software companies points to sector-specific concerns driving the trade.
The mark-to-market profit and loss for short-sellers betting against U.S. software stocks has reached $24 billion year-to-date, representing a substantial gain for bearish traders who correctly anticipated the sector’s struggles. However, authorities have not confirmed whether regulatory scrutiny of short-selling activity has increased alongside the growing positions.
Market participants will be watching whether short-sellers continue adding to their positions or begin taking profits, which could influence the trajectory of software stocks in coming weeks. The sustainability of the bearish trade remains uncertain as investors assess whether current valuations reflect appropriate risk or present buying opportunities.
