While the broader software sector rallied on Tuesday, one stock was noticeably missing out.

Shares of Palantir Technologies dropped 6.1% on Tuesday. Meanwhile, major enterprise software names such as Adobe, Salesforce and Workday rose 4% or more, as the broader sector was benefitting from a rotation out of chip stocks.

The data-analytics company has long eschewed the traditional software-as-a-service business model in favor of sending forward-deployed engineers directly to customers to create bespoke solutions. The company’s Artificial Intelligence Platform connects large language models to an organization’s internal data and workflows.

Palantir’s stock has commanded an expensive valuation as a result, but Tuesday’s stock decline could be a sign that it’s ceding some of its premium. Additionally, investors were rattled by a Bloomberg report on Monday detailing how France, Germany and other European countries are looking to swap Palantir with homegrown providers.

Software stocks have developed a negative correlation profile with semiconductor names, Matt Stucky, portfolio manager at Northwestern Mutual, told MarketWatch. Chip stocks are now experiencing a sudden pullback following a record-breaking run-up in the second quarter.

“Companies that were on the wrong side of that momentum trade are seeing that as a tailwind in the month of July, and software is probably the prime example of that,” Stucky said.

However, Palantir was “the one momentum trade within software that was working,” Stucky noted, describing the stock as a “poster child of momentum investing during 2025.”

Palantir shares were indeed an AI darling last year, rising over 130% over the course of 2025 as the company grew revenue by 56%. But its shares have faltered in 2026, falling 27% since the beginning of the year. The stock is currently valued at 68 times forward earnings, down from 170 times in January, according to FactSet.

While Palantir’s commercial business has been the main growth driver for the company in recent quarters, more than half of Palantir’s 2025 revenue came from its government contracts, and around 12% of total revenue came from international government contracts. As a result, a trend of European countries prioritizing sovereign control over their technology could have a significant impact on Palantir.

Earlier this month, the U.K. announced that it was reviewing its National Health Service contract with Palantir amid rising political opposition to the company.

D.A. Davidson analyst Gil Luria dismissed the controversy in a July note, pointing out that the NHS is a $60 million to $65 million contract “which within a couple of years will be less than 1% of revenue.” Luria believes that the British government will likely choose to keep its Palantir contract due to the effectiveness of the software.

As Palantir’s valuation compresses, the stock is garnering more institutional interest, according to Luria. Investors will get a closer look at Palantir’s business when the company reports second-quarter earnings next Monday, Aug. 3.