Highlights

Software stocks took a significant hit as AI disruption fears led to a bearish market trend. Notably, the iShares Expanded Tech-Software Sector ETF fell by 5.4%, marking its largest drop since last April. The fund's decline reflects the market's growing skepticism towards traditional software models. AI's potential to reshape industries is causing investor unease. Despite strong earnings from key players like ServiceNow, uncertainties about AI's impact linger.

Sentiment Analysis

• The sentiment around software stocks has turned notably negative, driven by apprehensions about AI's potential impact on traditional business models.
• This shift reflects a broader concern about the sustainability of current valuations and growth trajectories.
• Market reactions highlight the intense scrutiny software companies face as AI development accelerates.

Article Text

Investors have become increasingly wary of the traditional software sector as fears mount over the disruptions caused by rapid advancements in artificial intelligence (AI). On Thursday, the software segment witnessed sharp declines, pushed by the growing narrative that AI will significantly alter many established business models. The iShares Expanded Tech-Software Sector ETF experienced a sharp 5.4% drop, its most substantial one-day depreciation since April's tariff-induced slump.

This steep decline has resulted in the fund being over 22% down from its recent peak, indicating the software industry's entry into bear-market territory. The transition reflects how sentiment has drastically shifted away from an industry previously celebrated by Wall Street. Since the beginning of the month, the ETF has decreased by over 13%, putting it on track for its worst performance since the crisis-hit October of 2008, when it fell by 23%.

ServiceNow, one of the sector's bellwethers, faced a 10% stock drop despite surpassing Wall Street's fourth-quarter earnings expectations and issuing promising guidance. The skepticism seems rooted in concerns that AI technologies and automation might reduce the demand for conventional software licenses and workflows. As valuations justified by robust subscription growth return to question, the software sector grapples with the prospect of AI permanently diluting long-term revenue possibilities.

Adding to the pressure, tech giant Microsoft saw its shares slide 10% after reporting decreased cloud growth in its fiscal second quarter. This marked the company's steepest one-day drop since March 2020. Meanwhile, Anthropic rolled out Claude Opus 4.5, its latest model excelling in coding and other complex tasks, heightening investor concerns that established players are falling behind in the AI race. Melius Research's Ben Reitzes noted on CNBC's "Squawk on the Street" that Microsoft's perceived lag in innovation could test investor patience.

The German software heavyweight SAP also contributed to the negative sentiment, as its stock fell 15.2% following disappointing reports on its fourth-quarter cloud contract backlog. With results underwhelming expectations, the market's faith in established vendors appears to be wavering.

In response to these swirling anxieties, ServiceNow's CEO Bill McDermott emphasized the misplaced nature of fears that AI would fully replace software vendors, suggesting that real gains are realized when AI integrates with existing workflows. He posited that AI systems' probabilistic nature necessitates software like ServiceNow for reliable outcomes, asserting the company's role as an essential partner in enterprise AI adoption.

Key Insights Table