By Chris Dowse and Ben Galison

What does the smart money know? What has the economic meltdown exposed?

On May 22nd the stock market had valued the software industry at a 3.7% discount to the S&P500, based on the next-12-month price/earnings ratio. This isn’t particularly striking until we consider that for the past five years, the software industry has on average been priced at a 34% premium to the S&P 500.

What could account for this dramatic difference?

While there is definitely widespread uncertainty as to the timing and size of an economic recovery, a swing of this magnitude suggests the market believes something has fundamentally changed the software industry’s future capability to generate earnings. It is an indication that the market believes a structural shift is taking place and that the outlook for the coming year is dire.