Technology Sector Ideas

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Software stocks - >>> ‘Get me out’: Traders dump software stocks as AI fears erupt


Bloomberg

by Ryan Vlastelica

February 3, 2026


https://finance.yahoo.com/news/traders-dump-software-stocks-ai-115502147.html


(Bloomberg) — 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.

“We call it the ‘SaaSpocalypse,’ an apocalypse for software-as-a-service stocks,” said Jeffrey Favuzza, who works on the equity trading desk at Jefferies. “Trading is very much ‘get me out’ style selling.”

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. (TRI) plunged 16%. CS Disco Inc. (LAW) sank 12%, and Legalzoom.com Inc. (LZ) plummeted 20%.

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.

“I ask clients, ‘what’s your hold-your-nose level?’ and even with all the capitulation, I haven’t heard any conviction on where that is,” Favuzza said. “People are just selling everything and don’t care about the price.”

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’ software exposure almost by half in 2025, from about 20% at the start of the year.

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’s mattered little in the face of concerns about long-term prospects.

For example, Microsoft Corp (MSFT). reported solid earnings last week, but investors’ focus on slowing growth in cloud sales put fresh scrutiny on the amount it’s 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.

Microsoft fell 2.9% on Tuesday, its fourth straight negative session.

On the flipside, PalantirTechnologies Inc. (PLTR) 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%.

“The fear with AI is that there’s more competition, more pricing pressure, and that their competitive moats have gotten shallower, meaning they could be easier to replace with AI,” said Thomas Shipp, head of equity research at LPL Financial, which has $2.4 trillion in brokerage and advisory assets. “The range of outcomes for their growth has gotten wider, which means it’s harder to assign fair valuations or see what looks cheap.”

Those AI-related fears led Piper Sandler to downgrade software firms Adobe Inc. (ADBE), Freshworks Inc. (FRSH) and Vertex Inc. (VERX) on Monday. “Our concern is that the seat-compression and vibe coding narratives could set a ceiling on multiples,” analyst Billy Fitzsimmons wrote. Vibe coding refers to using AI to write software code.

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.

It doesn’t hurt that the software giant’s 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’s multiple is the lowest in years, and its RSI indicates it’s oversold.

The software sector is “probably oversold enough for a bounce,” Jonathan Krinsky, BTIG’s chief market technician, wrote in a note to clients last week. However, he added, “it is going to take a long time to repair and build a new base,” and that “we have not been fans of software for a while given the deteriorating relative strength that really accelerated” in the fourth-quarter of last year.

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.

“The draconian view is that software will be the next print media or department stores, in terms of their prospects,” said Favuzza at Jefferies. “That 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’re 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.”

Software stocks have tumbled in recent months as investors grow increasingly worried that AI could upend traditional software business models.

Companies in the sector within the S&P 500 (^GSPC) are down roughly 18% over the last six months, while the index itself is up 9% over that time frame. The biggest losers of the group include SAP (SAP), which is down 30%, as well as Salesforce (CRM) and ServiceNow (NOW), which have shed about 20% and 40%, respectively.

"Software sentiment has rarely been lower, with AI casting a shadow of uncertainty for the sector," Jefferies analyst Charles Brennan wrote in a note to investors earlier in January.

That shadow of uncertainty has two prongs. For one, investors worry that software-as-a-service (SaaS) firms’ customers could develop in-house software solutions using AI tools from large language model providers like Anthropic's Claude Code, reducing their reliance on providers like Salesforce. The recent release of Anthropic's new autonomous digital assistant Claude Cowork has only accelerated that fear.

Second, there is concern that AI is lowering barriers for entirely new enterprise software startups — including companies like Aurasell and Artisan AI — whose AI-native platforms could directly challenge the competitive advantages of established firms.

Older software players have raced to introduce agentic artificial intelligence offerings as they look to create AI tools that can not only generate answers but also take actions in the hopes of defending their core platforms from upstart rivals. But the platforms — such as Microsoft’s Copilot, Salesforce’s Agentforce, Snowflake Intelligence — are still getting off the ground.

“The SaaS companies are wholeheartedly embracing agentic AI and putting a lot of investment dollars into this, but adoption is going really slowly,” explained Macquarie analyst Steve Koenig.

“ You've got this disconnect between what the enterprise software companies are saying and the reality of agentic AI on the ground,” he continued.

In calls following earnings reports from Microsoft (MSFT), ServiceNow, and SAP on Wednesday, CEOs emphasized how their companies are benefiting from AI. ServiceNow CEO Bill McDermott argued that “AI doesn't replace enterprise [software]” but “depends on it.”

Still, the three software stocks continued to plunge on Thursday — as did those of fellow enterprise software sellers Salesforce, Snowflake (SNOW), Intuit (INTU), and Datadog (DDOG), among others.

But Futurum analyst David Nicholson agreed with software CEOs that the companies aren't so easily replaced, arguing that stringent requirements for data governance, security, and compliance in enterprise software make it far more challenging for new entrants — and for firms developing their own solutions — than the market often realizes.

“We're underestimating how risk-averse a real business is going to be to making wholesale changes and depending upon AI,” he said.

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