Tech has been caught off guard by a broad rotation set to take place in 2026, and the latest selloff in software stocks has only added to the pain. But on the other side of that pain was a $24 billion gain for short sellers.
The software route started this week, but some of the biggest names in tech have struggled all year, battling both micro and macro forces that have hurt demand for high-flying AI games.
For short sellers betting on these stocks, the past six weeks have been a windfall. A report from data analytics firm S3 Partners shows that short sellers have made billions in paper profits as they bet the technology would fall to nosebleed levels.
The firm noted that while short sellers have been betting against some of the biggest names in the software sector all year, they have increased their bearish positions recently as conditions changed and volatility increased.
“US software stocks have generated $24 billion in MTM PNL YTD for short sellers, while the sector’s market cap has fallen by $1 trillion,” the firm’s report said.
S3 highlighted several software stocks that short sellers are increasingly betting on
Of the software stocks on the list, Microsoft stands out, the company said, because of how short-selling behavior around it has changed during the sharp decline this year.
“Historically, MSFT behaves like a reversal stock, with shorts covering the way down,” S3 said. “Now it’s trading like a momentum-driven, distressed name, with shorts getting weaker and weaker.”
While AI trading has come under increasing scrutiny lately, the firm views the widespread bearish trading as specific to software stocks, as short interest in the overall Magnificent 7 and the Invesco QQQ ETF, which tracks the Nasdaq 100, has remained flat.
However, S3 continues to insist that hedge funds are focusing on increasing their short positions in large-cap tech, even as many sector leaders have already recorded big declines.
“The contagion is visible in short books, with AVGO and AMZN seeing short interest up 15% and 10%, and AVGO up 10% YTD,” he stated.
