Investors are increasingly on edge about the potential impact of artificial intelligence on various sectors, with recent developments triggering significant sell-offs in the stock market. Last week, AI startup Anthropic unveiled new automation tools designed to streamline work across different industries, raising alarm bells among investors who feared these innovations could threaten numerous businesses.
The immediate reaction was sharp, leading to widespread declines in a variety of stocks, including major players like Expedia Group Inc., Salesforce Inc., and London Stock Exchange Group Plc. Despite some recovery towards the end of the week—partially driven by dip buyers—the overall sentiment among Wall Street professionals is that this volatility marks a new phase in market dynamics.
“The frequency of new tool releases is accelerating,” said Daniel Newman, CEO of the Futurum Group. “The number of companies facing potential disruption from AI is expanding every day.”
Even with a slight rebound in stocks like the iShares Expanded Tech-Software Sector ETF (IGV), the damage was notable. Thomson Reuters Corp. saw its Canada-listed shares plummet by 20%, marking its largest weekly decline ever, while financial research firm Morningstar Inc. experienced its worst week since 2009. Other software companies, including HubSpot Inc., Atlassian Corp., and Zscaler Inc., also suffered significant drops.
In total, 164 stocks across software, financial services, and asset management collectively lost $611 billion in market value last week. The funding landscape for AI and associated technologies has been radically reshaped since the emergence of OpenAI’s ChatGPT in late 2022, with much of the market’s previous focus on companies reaping the rewards of increased investment in computing infrastructure. However, with companies like Anthropic and OpenAI rapidly introducing new capabilities, the narrative has shifted towards concern for existing players.
This anxiety has been exacerbated by disappointing earnings from software companies, particularly Microsoft Corp., which lost $357 billion in market value in a single day due to slowing revenue growth in its cloud-computing division. ServiceNow Inc. and SAP SE also saw significant drops following lackluster results.
Jackson Ader, a software analyst at KeyBanc, noted, “It was the stalwarts that failed us. If your results and guidance aren’t compelling, it raises questions about the entire sector’s prospects.”
While numerous firms faced harsh scrutiny, traditional software companies bore the brunt of the downturn. Salesforce, for instance, has plummeted by 48% from its December 2024 highs, while ServiceNow has dropped 57% since its January 2025 peak.
Jim Awad, senior managing director at Clearstead Advisors, expressed mixed feelings about the future of affected companies, stating, “Some will adapt and thrive, but others may face permanent disruption to their business models.”
Investors’ sentiment has driven software stocks to record lows in net sales since the year began, with hedge fund exposure hitting a historic low below 3%, down from 18% last year. Despite this panic, some analysts see signs of hope—earnings forecasts for software in the S&P 500 have been upgraded, projecting a 19% growth in 2026.
Michael Mullaney, director of global market research at Boston Partners, captured the duality of current investor sentiment by saying, “Everyone assumes the bottom is going to fall out, but I’m skeptical.” He added that profit margins could remain stable amid disruptions, suggesting a potential opportunity for growth managers to capitalize on current low prices.
The overwhelming selling pressure has pushed software stocks into traditionally oversold territory. The iShares ETF’s 14-day relative strength index recently hit 15, the lowest in nearly 15 years. Moreover, valuations continue to plummet, with a basket of software stocks declining to a record low of 21 times estimated profits, significantly down from over 100 in late 2021.
KeyBanc’s Ader remarked on the uncertainty clouding the market, saying, “We continue to test the valuation floor and then blow right through it,” highlighting how fear is preventing a clearer assessment of value, even despite historically low multiples being a signal for potential buying opportunities.
