Wall Street has been skeptical about software stocks for a while, but sentiment has gone from bearish to doomsday lately with traders dumping shares of companies across the industry as fears about the destruction to be wrought by artificial intelligence pile up.<\/p>\n
\u201cWe call it the \u2018SaaSpocalypse,\u2019 an apocalypse for software-as-a-service stocks,\u201d said Jeffrey Favuzza, who works on the equity trading desk at Jefferies. \u201cTrading is very much \u2018get me out\u2019 style selling.\u201d<\/p>\n
The anxiety was underscored Tuesday after AI startup Anthropic released a productivity tool for in-house lawyers, sending shares of legal software and publishing firms tumbling. Selling pressure was evident across the sector with London Stock Exchange Group Plc, which has a large data analytics business, falling 13%, while Thomson Reuters Corp. plunged 16%. CS Disco sank 12%, and Legalzoom.com plummeted 20%.<\/p>\n
Perceived risks to the software industry have been simmering for months, with the January release of the Claude Cowork tool from Anthropic supercharging disruption fears. Video-game stocks got caught up in the slide last week after Alphabet Inc. began to roll out Project Genie, which can create immersive worlds with text or image prompts. All told, the S&P North American software index is on a three-week losing streak that pushed it to a 15% drop in January, its biggest monthly decline since October 2008.<\/p>\n
\u201cI ask clients, \u2018what\u2019s your hold-your-nose level?\u2019 and even with all the capitulation, I haven\u2019t heard any conviction on where that is,\u201d Favuzza said. \u201cPeople are just selling everything and don\u2019t care about the price.\u201d<\/p>\n
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The concerns are brewing in private equity as well, with firms including Arcmont Asset Management and Hayfin Capital Management hiring consultants to check their portfolios for businesses that could be vulnerable, according to people with knowledge of the matter. Apollo cut its direct lending funds\u2019 software exposure almost by half in 2025, from about 20% at the start of the year.<\/p>\n
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Among US public companies, so far this earnings season just 67% of software companies in the S&P 500 have beaten revenue expectations, according to data compiled by Bloomberg. That compares with 83% for the overall tech sector. While all software stocks have beaten earnings expectations, that\u2019s mattered little in the face of concerns about long-term prospects.<\/p>\n
For example, Microsoft Corp. reported solid earnings last week, but investors\u2019 focus on slowing growth in cloud sales put fresh scrutiny on the amount it\u2019s spending on AI, sending the stock tumbling 10% on Thursday. January was the worst month for Microsoft shares in more than a decade. Meanwhile, earnings reports from ServiceNow Inc. and SAP SE gave investors additional reasons to be cautious about growth prospects for software companies.<\/p>\n
Microsoft fell 2.9% on Tuesday, its fourth straight negative session.<\/p>\n
On the flipside, Palantir Technologies Inc. gave a bullish revenue forecast when it reported earnings after the bell on Monday. It also posted fourth-quarter revenue growth of 70%, exceeding Wall Street estimates. Shares rose 6.9%.<\/p>\n
\u201cThe fear with AI is that there\u2019s more competition, more pricing pressure, and that their competitive moats have gotten shallower, meaning they could be easier to replace with AI,\u201d said Thomas Shipp, head of equity research at LPL Financial, which has $2.4 trillion in brokerage and advisory assets. \u201cThe range of outcomes for their growth has gotten wider, which means it\u2019s harder to assign fair valuations or see what looks cheap.\u201d<\/p>\n
Those AI-related fears led Piper Sandler to downgrade software firms Adobe Inc., Freshworks Inc. and Vertex Inc. on Monday. \u201cOur concern is that the seat-compression and vibe coding narratives could set a ceiling on multiples,\u201d analyst Billy Fitzsimmons wrote. Vibe coding refers to using AI to write software code.<\/p>\n
To be sure, some investing pros view the selloff in software stocks as an opportunity. The Sycomore Sustainable Tech fund, a European open-end fund that has beaten 99% of its peers over the past three years, bought Microsoft shares amid the downturn on the expectation that the company will eventually emerge as an AI winner.<\/p>\n
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It doesn\u2019t hurt that the software giant\u2019s stock looks cheap at the moment, trading for less than 23 times estimated earnings, the lowest in about three years. And from a technical perspective, its 14-day relative strength index is in oversold levels. More broadly, the software index\u2019s multiple is the lowest in years, and its RSI indicates it\u2019s oversold.<\/p>\n
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The software sector is \u201cprobably oversold enough for a bounce,\u201d Jonathan Krinsky, BTIG\u2019s chief market technician, wrote in a note to clients last week. However, he added, \u201cit is going to take a long time to repair and build a new base,\u201d and that \u201cwe have not been fans of software for a while given the deteriorating relative strength that really accelerated\u201d in the fourth-quarter of last year.<\/p>\n
The central issue facing investors who want to buy software stocks is separating the AI winners from the losers. Clearly, some of these companies are going to thrive, meaning their stocks are effectively on sale after the recent rout. But it may be too early to determine who they are.<\/p>\n
\u201cThe draconian view is that software will be the next print media or department stores, in terms of their prospects,\u201d said Favuzza at Jefferies. \u201cThat the pendulum has swung so far to the sell-everything side suggests there will be super-attractive opportunities that come out of this. However, we\u2019re all waiting for an acceleration, and when I look out to 2026 or 2027 numbers, it is hard to see the upside. If Microsoft is struggling, imagine how bad it could be for companies more in the path of disruption, or without its dominant position.\u201d<\/p>\n
\u00a9 2026 Bloomberg<\/p>\n
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