Software stocks are nearing record highs while the chip sector remains entrenched in a bear market — though NVIDIA stands as a notable exception, having avoided a true downturn. The rotation between these sectors unfolded almost simultaneously. Chips peaked on June 22; software found its bottom at virtually the same moment, triggering a multi-trillion-dollar reversal that sent the two groups in sharply divergent directions.

Strip out the mega-cap giants and the contrast becomes even more striking. The equal-weight S&P Software & Services ETF (XSW) has climbed roughly 24% since that turning point, while the equal-weight S&P Semiconductor ETF (XSD) has dropped about 24%. That near-50-percentage-point performance gap marks the widest margin of software outperformance over chips since both ETFs launched in 2011. The equal-weight software fund has surged while its chip counterpart has tumbled, producing a historical spread of nearly 50 points — a record divergence.

This is no index-construction illusion. Among the 45 software names tracked by Yahoo Finance, 37 have risen since June 22; of the 60 chip stocks, 59 have fallen. The market capitalization involved is enormous. Since the rotation began, Microsoft alone has added nearly $900 billion in value. Meanwhile, Micron, TSMC, Arm, and AMD have collectively shed roughly $950 billion. In aggregate, the software sector has gained about $1.5 trillion in market cap while chips have lost approximately $2.6 trillion.

Mark Newton, head of technical strategy at Fundstrat, believes software has already completed its correction and cleared out the excess. "Software has been through its adjustment and is now trading noticeably better." Software had seen previous rallies that faded, but this time feels different. Salesforce bottomed on June 22; Adobe, ServiceNow, and Microsoft followed within the next three trading sessions. Micron, by contrast, marked its cyclical high on June 25.

Longer-term index data shows just how unusual this rotation is. From June 22 through last Friday, the S&P North American Technology Software Index rose about 19%, while the PHLX Semiconductor Index (SOXX) fell roughly 20%. In public data stretching back to 1994, only the peak of the internet bubble produced a larger two-month differential — but back then, both software and chips were soaring together. This time, software is climbing while chips are falling, marking the first such divergence at this magnitude in history.

Now consider NVIDIA. The stock posted its worst single-day performance since July on Monday, yet over the roughly four months of chip-sector weakness, it has essentially traded sideways. Through multiple selloff waves, NVIDIA has moved more in line with the mega-cap tech giants than with the surrounding semiconductor complex. NVIDIA was already at its current price level back in late April.

This sets up a compelling earnings season this week. NVIDIA reports on Wednesday. With the stock holding steady while other chip names have weakened sharply over four months, this report will be a major test of whether it can continue to resist the sector's selling pressure. Newton, however, is not bearish on semiconductors. "You should be positioned in tech. Tech will lead the market, and it's clearly where the vast majority of earnings growth resides. The semiconductor sector will make a comeback."