Software has transformed the world. Now, Wall Street fears that AI might disrupt the software industry itself.

AI Sparks Investor Anxiety in Software Sector

For over a decade, enterprise software has steadily taken over nearly every corner of the business world. Its influence seemed unstoppable—until now. This week, investor concerns reached new heights as the rapid progress of artificial intelligence, led by companies like Anthropic, cast doubt on the future of traditional software business models.

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Major software-as-a-service companies such as Salesforce and Adobe have faced months of pressure, as investors worry that AI could make their core offerings obsolete. While both saw a slight recovery midweek, the overall trend remains negative.

According to Dow Jones Market Data, software stocks have underperformed the S&P 500 more than ever before in the past six months. This week, the market reacted strongly, penalizing any business tied to the software sector. Anthropic’s release of nearly a dozen new plugins for its Claude Cowork platform, expanding AI’s reach into sales, legal, and data analysis, only intensified these fears.

Investors responded by offloading shares not only of pure software firms but also of established business-service companies that have evolved into software providers. The selloff began with legal information services like Thomson Reuters and RELX, and soon spread across the broader IT sector. While Thomson Reuters rebounded slightly, RELX continued to decline.

Online legal service providers such as LegalZoom and CS Disco experienced sharp drops, and IT consulting giants Capgemini and Infosys also suffered significant losses. The software industry as a whole has been hit hard, compounding losses that began last summer. EPAM Systems and Accenture both saw only minor recoveries after steep declines, while Gartner and News Corp. continued to slide.

“The widespread selling across the sector suggests a deeper concern about the competitive advantages of information-services companies in this new AI era,” noted Andrew Nicholas, analyst at William Blair.

Nicholas also pointed out that the recent selloff in firms like S&P Global, Moody’s, Equifax, TransUnion, and Verisk Analytics seemed irrational, given their stronger potential to benefit from AI compared to other professional services.

Asset managers involved in private lending, such as Blue Owl Capital, were also caught in the downturn, with Blue Owl’s shares dropping over 10% in just two days. The launch of Claude Cowork accelerated losses for many alternative asset managers, as investor attention shifted from AI data-center exposure to software vulnerabilities.

Gina Martin Adams, chief market strategist at HB Wealth, observed that while last fall investors were focused on risks to the AI trade—such as circular lending and the massive capital needed for data centers—concerns about AI’s disruptive power have now returned to the forefront.

“Sometimes it’s hard to separate narrative from fundamentals,” Adams said. “Yesterday’s story was that AI is going to devour software.”

Strategists at BofA Global Research highlighted that business development companies managed by private-credit firms like Blue Owl have significant exposure to the software industry, with about a quarter of their total loans tied to the tech sector.

The Era of Software Dominance

Back in 2011, Marc Andreessen famously declared in a Wall Street Journal column that “software is eating the world.” He predicted that companies in every field—from agriculture to defense—would become software-driven. His foresight proved accurate: since then, businesses across industries have adopted subscription-based software models, fueling years of growth and high valuations.

Recently, however, investors have started to question whether these lofty valuations are justified, especially as AI emerges as a disruptive force. A Conference Board study from October found that 72% of S&P 500 companies had identified AI as a significant risk in their public filings, according to BofA analysts.

Software stocks began their ascent to the top of the U.S. equity market around the time of Andreessen’s essay, peaking for some during the pandemic-driven cloud computing boom. But over the last six months, most software companies have faced persistent selling pressure. Even Palantir Technologies, a leader in AI and one of last year’s top performers, saw its shares drop over 11% in a single day.

Some market watchers believe the selloff has gone too far. The focus within tech has shifted from software to hardware, particularly semiconductor companies. Yet, amid the widespread declines, some investors see opportunities for selective stock picking. Joseph Shaposhnik, manager of the Rainwater Equity ETF, reduced his software holdings over the summer, including most of his stake in Constellation Software.

“Software has become essential to most businesses over the past 25 years,” Shaposhnik said. “But not all software companies are alike. Some will be hit harder by these changes, while others may actually benefit.”

Others, like Mizuho analyst Jordan Klein, questioned whether the market’s reaction is overblown, noting that recent software company results have been solid, adding to the confusion about the selloff’s causes.

“Imagine what would happen to software stocks if we actually got truly bad news, like a real slowdown in growth or major companies admitting AI is hurting their core business. The current selling would pale in comparison,” Klein wrote.

Weakness in software stocks has also influenced Wall Street forecasts. Research from Trivariate shows that sales and earnings estimates for software firms in the Russell 3000 have turned sharply negative, suggesting the downturn is not just about sentiment.

Despite the pain spreading to other parts of the market, some traders argue that the selloff is overdone. Michael Toomey, managing director at Jefferies, remarked, “I’ve never seen sentiment this negative in any sector. I think we’re due for a strong rebound in software.” He cited the iShares Expanded Tech-Software Sector ETF reaching its most oversold level relative to the S&P 500 in history.

Even Nvidia CEO Jensen Huang weighed in, expressing surprise at the mass exodus from software stocks and calling the idea that AI will replace software companies “completely illogical.”

Nevertheless, these reassurances did little to stem the decline. While some professional-services stocks recovered slightly, the IGV ETF dropped another 1.8%.

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