The first leg down in software was about duration — how far out investors were willing to discount its cash flows. The second, if it comes, is about something more dangerous: the earnings themselves becoming less certain just as the discount rate climbs again.
The first leg was about duration
The market did not immediately decide that all software earnings were impaired. It decided that those earnings could no longer be discounted with as much confidence as before. AI introduced uncertainty around product durability, pricing power, competitive moats, seat-based models, and long-term customer retention. As a result, investors shortened the valuation horizon they were willing to assign to future software cash flows.
Figure 1. Global X Cloud Computing ETF (CLOU), weekly. Software’s first derating in one picture: a multi-year range since the 2021 peak — lower highs grinding against rising lows — while earnings held. The duration discount, doing its work slowly.
Software stocks derated while earnings held up. That was derating step one.
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