Market Performance

January 2026 marked one of the weakest starts to the year for B2B software equities in recent memory. The B2B software universe declined by more than 10% during the month, while broader indices remained relatively flat, with the S&P 500 up around +1.4% and the Nasdaq up approximately +0.9%.

Weighted by market capitalization, the decline was more moderate, reflecting the relative resilience of mega-cap and large-cap software companies. Smaller and mid-cap names bore the brunt of the correction, with losses felt across all clusters, including vertical software, horizontal applications, and infrastructure.

Market participants increasingly reassessed “price-to-perfection” multiples, as software is no longer perceived as alow-risk, structurally high-growth asset class in the context of accelerating AI disruption and macro uncertainty.

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Market Valuations

Valuations declined sharply in January, mirroring equity performance.

From an EV/Sales perspective, the B2B software universe fell by approximately 11% during the month, moving from around 5.6x at the end of 2025 to roughly 5.0x by the end of January, reaching multi-year lows.

EBITDA multiples also compressed, falling below 18x according to management commentary. Rule of 40 companies continued to trade at a premium, with average multiples around 8.4x, despite broad-based downgrades across growth cohorts.

The valuation gap between North America and Europe remained elevated. European software companies traded close to their 10-year lows at around 3.1x EV/Sales, while North American peers benefited from stronger expected growth. Growth expectations stood at approximately 11% in North America versus 4% in Europe.

Revenue growth continued to command a meaningful premium over free cash flow margins, though this premium declined to about 45%, down from 77% in 2025.

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Deal Flow

Private and venture deal activity remained active entering 2026, despite weaker public market sentiment.

A notable transaction highlighted during the session was HG’s public-to-private acquisition of OneStream, an enterprise performance management platform, at an EV/Sales multiple of 10.8x, more than double the B2B software universe average of around 5x. This underscored sustained appetite for high-quality assets in private markets.

Venture capital activity continued to be driven by AI. In December 2025, $12.2B was invested across 112 AI-related deals, though the month underperformed relative to earlier periods due to a lack of mega-deals.

Databricks accounted for nearly one-third of December investments through a $4B Series L round led by Insight Partners.

Excluding mega-deals, December still recorded $8.2B invested across 111 transactions, the strongest month in the dataset outside of major outliers.

Key funded segments included:

• Healthcare: $1.2B across 19 deals
• Financial Services: $920M across 12 deals
• Hardware: ~$700M across 11 deals
• Cybersecurity: ~$600M across 9 deals
• Martech: ~$600M across 8 deals

What to Watch

IPO Momentum and Public Market Sentiment

Recent IPOs in the software sector have largely underperformed, with most companies that listed in 2025 showing double-digit negative returns post-IPO. CoreWeave remained a notable exception, while Figma and NielsenIQ struggled after listing. This trend may deter new software IPOs in the coming quarters.

Macro Stability and Valuation Gaps Persist

U.S. inflation stood at approximately 2.7% as of December 2025, remaining above the Federal Reserve’s 2% target. Both the Fed and the ECB maintained policy rates, suggesting that valuation compression was driven not only by monetary policy, but also by AI-related disruption risks and geopolitical uncertainty.

Markets are increasingly adjusting to a higher baseline cost of capital and more selective risk pricing.

Segment Trends and Earnings Insights

Segment-level valuation premiums persisted for majors and infrastructure software, supported by AI-related tailwinds, though management cautioned about elevated investment requirements and execution risk.

Growth outlook revisions highlighted several potential areas of opportunity in 2026, including:

• CRM, CMS, and marketing software
• Payments and e-commerce
• Cybersecurity
• Workflow and productivity management

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Early Q4 2025 earnings results showed solid fundamentals but mixed market reactions.

Key examples included:

• Meta: +24% YoY advertising growth and +23% YoY revenue growth, supported by AI-driven improvements, leading to positive post-earnings performance‍
• Microsoft: +16% YoY revenue growth and +39% Azure growth, but shares fell ~12% amid concerns over rising CapEx‍
• SAP: Missed revenue consensus and lowered guidance due to slower ramp-up of large transformation deals
• ServiceNow: Negative reaction despite an earnings beat, as RPO growth lagged historical averages.

Overall, earnings confirmed a more sensitive market environment, with heightened scrutiny on capital intensity, growth durability, and AI monetization.

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