The tech pair trade that saw investors go long chips and short software lit up the stock market for much of 2026. Now it's on life support.

Through the end of June, the iShares Semiconductor ETF was up 113% while the iShares Expanded Tech-Software Sector ETF fell 14%. In July, though, the chip ETF tumbled 21%, while software rose 4.4%. That one-month move led to the sudden unwinding of once little-known hedge fund Situational Awareness, which had made heavily leveraged bets on the pair trade

Now the trade's reversal has gone...sideways. So far this month, chips and software have moved in tandem, with the sectors posting solid gains of 11% and 8%, respectively.

On Monday, the old pattern resumed, at least temporarily, with the SOXX up 1.6% on the day and IGV down 2%.

Ultimately, the AI trade has become much more idiosyncratic, with each side now on a journey of its own.

There are still hundreds of billions of dollars being spent on chips for the AI data center boom, and several ways in which AI disrupts current software offerings.

All but one of the 30 constituent stocks in the chip ETF are up this month and the bull case remains intact.

This remains a simple story of a generational investment tide lifting many boats-though some more than others. As Mizuho analyst Jordan Klein wrote on Monday: "You get lazy or complacent in Semis, and you could lose a lot of money fast. Not for the faint of heart."

The open question remains whether there is enough willing capital to keep data-center investment rising into next year and 2028.

Meanwhile, the discussion around software has gotten much more nuanced. Earlier this year investors were indiscriminately unloading all business software stocks. By May, investors began to realize that there were at least a handful of software companies that were actually winners in the emerging AI ecosystem. The software ETF rose 21% in May, though it gave much of it back in June.

Data managers like Snowflake saw a big bounce. Its shares sank 38% through April, but then were up 87% in May and have kept going. The stock is now up 51% this year.

Investors have also flocked to cybersecurity firms like Palo Alto Networks. Its stock was down 3% through April. A subsequent rally means it has now doubled in 2026. The stock is a 10% holding of the software ETF, so it has a big influence on the fund's performance.

In August, another small set of software firms used strong earnings reports to push back on the bear case. Palantir Technologies shares slid 31% through July, but have erased almost all of that loss. Palantir also makes up 10% of the software fund. Atlassian has had a similar recent rally and is almost even on the year.

Software earnings season is only just beginning, so stocks that are down on the year will have a chance to change the conversation. Intuit, Salesforce, and Autodesk report next week. For years, those software names had lofty price-to-earnings ratios. Today, all three trade at a discount to the S&P 500.