A wave of market panic triggered by advancements in artificial intelligence (AI) technology is spreading globally, with the software sector bearing the brunt of the sell-off, and the downward trend showed no signs of abating on Wednesday. JPMorgan indicated that investor pessimism towards the sector continues to deepen. JPMorgan analyst Toby Ogg stated bluntly, "The current environment for the software sector is no longer just about 'presumption of guilt'; it has escalated to a state of 'premature judgment'." Over the past two weeks, Ogg engaged with over 50 investors across Europe and the US, finding that these investors had significantly reduced their holdings in software stocks over the past 12 to 18 months. He noted in a client report that even after the recent pullback, the appetite for bargain-hunting in software stocks remains generally weak.
This sentiment stems from a collective plunge in software, financial services, and asset management stocks on Tuesday, driven by concerns over market competition after AI startup Anthropic launched new AI automation tools. Investors are increasingly worried that breakthroughs in generative AI technology threaten the survival space of numerous companies. Statistics show that on Tuesday, a basket of US software stocks tracked by Goldman Sachs plummeted 6%, marking the largest single-day drop since the tariff-induced sell-off in April. A financial services index tumbled nearly 7%, while the Nasdaq 100 index saw an intraday decline of up to 2.4%, ultimately closing down 1.6%; global related sectors collectively lost approximately $285 billion in market value that day.
The selling pressure quickly spread to Asian markets on Wednesday, while the decline persisted in European markets. An index of European companies facing AI disruption risks, compiled by UBS Group, fell another 2.1% on Wednesday after an 8% plunge on Tuesday. Shares of software giants like SAP (SAP.US) and Sage Group continued to trend lower. In reality, AI-related fears in the software industry have been brewing for months. Concerns about industry disruption were amplified as early as January when Anthropic introduced its Claude Cowork tool; last week, the launch of Google's (GOOGL.US) Project Genie, which can generate immersive worlds from text or images, further dragged gaming stocks into the downturn.
So far, the S&P North American Software Index has fallen for three consecutive weeks, with a cumulative drop of 15% in January, marking its worst monthly performance since October 2008. The iShares Expanded Tech-Software Sector ETF has declined for six straight trading sessions, also plunging 15% in January for its poorest monthly showing since 2008. Ogg wrote in the report that for software companies, "exceeding earnings expectations is no longer enough to impress the market." He suggested that unless companies can "irrefutably demonstrate that AI is a sustainable growth catalyst, not a long-term impediment," sentiment is unlikely to improve.
In the current US earnings season so far, only 67% of software companies in the S&P 500 have reported revenue above expectations, significantly lower than the overall technology sector's beat rate of 83%. Even a giant like Microsoft (MSFT.US), which reported solid earnings last week, saw its shares drop 10% in a single day due to concerns over slowing cloud growth and AI investments, making January its worst month in over a decade. Ogg stated that breaking this cycle of negativity is challenging for software companies because investor concerns are multi-faceted. The per-seat pricing model, common in the industry, is particularly vulnerable—the use of AI tools could reduce the number of user accounts clients need to complete tasks, directly impacting this core revenue model.
Furthermore, if software companies develop their own AI tools for product iteration, their existing revenue models face transformation risks. Ogg also noted that any new product releases from leading AI platforms, such as the legal-focused AI tool recently launched by Anthropic, would further exacerbate investor anxieties towards the software sector.
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