Software Stocks Face Massive Sell-Off as AI Anxiety Grips Investors
For months, investors have been rapidly divesting from software stocks, driven by mounting fears about the disruptive potential of artificial intelligence. This widespread anxiety has created a challenging environment for the sector, with upcoming earnings reports from major companies unlikely to provide immediate relief.
Earnings Season Arrives Amidst Persistent Concerns
This week, several prominent software firms are scheduled to release their financial results, including industry leaders such as Workday Inc., Salesforce Inc., Intuit Inc., Autodesk Inc., and Snowflake Inc. However, the pervasive worry about AI's impact on growth has become so dominant that management teams may find themselves with limited options to reverse the negative sentiment in the short term.
"Everyone wants to just hit the sell button and get out," explained Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, which oversees US$1.4 trillion in assets. "These companies are guilty until proven innocent."
Market Performance Reflects Deepening Pessimism
The software sector's struggles were clearly visible recently when investors continued to unload positions following a Citrini Research report detailing potential AI-related risks. The software and services category emerged as one of the poorest performers within the S&P 500 Index. The iShares Expanded Tech-Software Sector ETF, trading under the ticker IGV, experienced a significant 4.8 percent decline and appears headed toward its worst quarterly performance since 2008.
Options market activity suggests traders anticipate further declines ahead. Janasiewicz noted that the deteriorating sentiment has created "a real bias toward additional downside." Year-to-date performance data reveals substantial losses for key companies: Salesforce has dropped 30 percent, Intuit has fallen 45 percent, Autodesk has shed 25 percent, Snowflake has slumped 26 percent, and Workday has lost 39 percent. Meanwhile, the broader S&P 500 has managed to remain slightly positive for the year.
AI Tools Fuel Disruption Fears
Much of the apprehension centers on new AI capabilities from companies like Anthropic, OpenAI, and Alphabet Inc. that enable users to "vibe code"—using artificial intelligence to generate software code. This technological advancement raises concerns that if anyone can create their own applications, demand for products from established software providers could diminish significantly.
Recently, Anthropic introduced new AI tools designed to automate work across various fields including human resources, investment banking, and design. While this announcement included partnerships with software companies like Intuit and DocuSign Inc., providing a temporary boost to the sector, the underlying anxiety about long-term disruption remains.
Strong Fundamentals Contrast with Market Sentiment
Despite the market's negative reaction, actual financial performance tells a different story. Among the 15 software companies in the S&P 500 that have reported earnings this season, 87 percent have exceeded profit expectations and 67 percent have surpassed revenue forecasts, according to Bloomberg data. This compares favorably to the broader market, where approximately 75 percent of S&P 500 companies have beaten earnings estimates.
This divergence between strong fundamentals and weak stock performance has led Bank of America strategists, led by Savita Subramanian, to declare software "the new value sector" in a recent client note. Their assessment appears justified, as the S&P 500 software and services index currently trades at less than 21 times forward earnings—its lowest valuation in over three years and well below its five-year average of 29.
While the potential for AI disruption remains a legitimate concern, its impact has yet to materialize in company financials. This disconnect has prompted many Wall Street professionals to view the current software stock slump as excessive and potentially creating investment opportunities for those willing to look beyond the prevailing pessimism.
