This is actually an incredible time to be a software company. – Nvidia CEO Jensen Huang, 2026
This is actually an incredible time to be a software company.
For much of 2026, software companies have been in the crosshairs of investors due to concerns that AI agents could allow businesses to build more of their own software and disrupt existing business models. Those concerns have led to a broad repricing across the capital structure, with the software sector of the S&P 500 Index falling 34% from its peak, and software loans also coming under pressure.
Software’s importance to credit reflects how aggressively the sector was financed during the post-COVID-19 boom of 2021. The sector represents approximately 9% of the S&P 500 but almost 13% of the broadly syndicated loan (BSL) market, reflecting the popularity of software leveraged buyouts during that period. The credit thesis was straightforward: Software companies often had high margins, recurring revenue and relatively low capital needs, traits that appeared to make their cash flows durable enough to support substantial leverage. That logic extended into more speculative corners of leveraged finance, including business development companies, where exposure to software is estimated to exceed 20%.
This thesis began to break down as increasingly capable AI models raised concerns that businesses could “vibe code” more of their own software rather than continue paying substantial licensing fees to software companies. The market began to question both the long-term value of existing software franchises and whether highly leveraged companies would generate enough cash flow to service their debt. Software loan prices fell below 88 cents on the dollar, signaling significant stress in the largest sector of the BSL market.
More recently, a divergence has emerged, with software equities retracing more than half their drawdown while software loan prices remain below 90 cents on the dollar. The rebound in equities suggests the market might no longer view AI as a uniform threat to software, while continued weakness raises the question of whether concerns remain for more highly leveraged software companies.
The different types of companies represented in the equity and loan markets could help explain at least part of the divergence. Many large software companies have the financial resources, customer relationships and installed infrastructure to turn AI into an opportunity. Smaller, more leveraged software companies might have less flexibility to invest through the transition while continuing to service substantial debt loads.
Microsoft’s most recent earnings call offered one example of how software companies could harness AI instead of being displaced by it. CEO Satya Nadella outlined a future where different AI models can be mixed and matched with software as an infrastructure layer built around context, memory, workflows, integrations, security, compliance and enterprise trust. The value might lie with software companies that own the customer relationship and can apply AI directly to a customer’s existing workflows, even if the underlying models become more interchangeable. Software can become the tool through which AI is deployed rather than something AI simply replaces.
The divergence between software equities and loans could therefore be less a disagreement between markets than a sign that investors are becoming more discerning about which software companies can benefit from AI. Large, well-capitalized software companies have more flexibility to invest in AI and incorporate it into their existing products, while more highly leveraged borrowers have less room to absorb weaker growth, higher investment needs or execution mistakes. For software credit, the key question could increasingly be whether borrowers have enough financial flexibility to navigate the transition while continuing to service their debt.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
