Software Sector Faces 2023-Low Test as AI Drives 30% Terminal Valuation Compression (XOMNI, IGV)

The software and services sector faces a potential retest of 2023 lows as AI-driven terminal value compression deepens. Citigroup's latest strategy note warns that if terminal P/E multiples are further compressed by 30%, the sector could fall to mid-2023 levels, implying a possible erosion of up to a third of long-term terminal value. Data shows the sector down about 20% since the start of the year and -28% from its October 2025 high. The decline reflects accelerating multiple compression, with implied earnings growth needed to justify current valuations tightening materially if compression reaches 30%. The S&P 500 outperformed in the past three months by about 24 points. Valuation metrics have converged sharply: EV/ Sales back to 2023, EV/FCF to 2021, and forward P/E near a decade low. Trading activity in major software ETFs (e.g., XOMNI, IGV) has spiked alongside rising implied volatility, signaling a panic phase that may see a short-term technical rebound but not a resolution of long-term risk. The broader market has flowed toward energy, industrial, and consumer sectors as software shares weaken. Going forward, the sector is expected to become more分化, with companies integrating AI to improve efficiency likely to outperform those whose business models are vulnerable to automation.