AI fear hits software stocks hard: Is it "utterly illogical" panic, or the end of SaaS?

Anthropic’s new AI tool released this week triggered a large-scale sell-off in software stocks, as investors are reassessing which software companies can survive in the age of AI.

The S&P 500 Software & Services Index fell more than 4% overnight, marking its eighth consecutive day of decline and bringing its year-to-date drop to around 20%. Companies such as Thomson Reuters, Salesforce, and LegalZoom suffered heavy losses this week, and the selling spree spread to Asian IT firms Tata Consultancy Services and Infosys.

Anthropic’s new tool for its Claude “Cowork” AI agent is designed to handle complex professional workflows—precisely the core products of many software and data providers. These AI agents target functions such as legal and technical research, customer relationship management, and analytics, sparking concerns that AI may undermine traditional business models in the software industry.

Nvidia CEO Jensen Huang said on Wednesday that such panic is “the most illogical thing in the world,” but hedge funds have shorted about $24 billion worth of software stocks so far this year, showing institutional investors’ cautious outlook for the sector.

Tech Leaders Fight Back: Is AI a Threat or an Enhancement Tool?

At an event on Wednesday, Huang explicitly refuted market fears. “There’s an idea that the software sector is in decline and will be replaced by AI,” he said. “That’s the most illogical thing in the world.” This influential tech leader believes that AI will be used to enhance existing software tools, not completely reinvent them.

Arm Holdings CEO Rene Haas echoed this view this week. On an earnings call, he said that enterprise AI deployment is still in the early phase and has yet to bring large-scale transformational impact. According to the Financial Times, Haas described the recent market panic as “micro-hysteria.”

Anthropic launched what it calls an improved AI model on Thursday, just days after its latest Claude tool sparked investor concerns.

Analyst Divide: Doomsday Scenario or Profit Pressure?

Wedbush Securities echoed Huang’s view in a Wednesday research report, saying that while AI is a headwind for software providers, the sell-off reflects a “doomsday scenario for the industry, which is far from reality.”

The firm pointed out, “Enterprises will not completely overturn hundreds of billions of dollars of prior software infrastructure investment and switch to companies like Anthropic and OpenAI.” Wedbush Securities stated that large businesses have built up trillions of data points over decades, and these data are deeply embedded in their software infrastructure.

However, other analysts foresee more lasting pressure. Consultancy Constellation Research said on Wednesday that the sell-off reflects concerns about AI potentially squeezing profits and limiting software companies’ pricing power, rather than foretelling the industry’s demise.

Futurum Group tech stock analyst Rolf Bulk told CNBC: “SaaS is quite likely to be eroded by AI-driven workflows, which will affect sector valuation multiples.”

Who Can Survive in the Age of AI?

Despite concerns, Bulk believes some software providers—especially those running mission-critical enterprise workloads, such as Oracle and ServiceNow—still hold enduring ‘profit rights’. He added that the depth of these companies’ data and their entrenched position in customer workflows make them more likely to coexist with AI rather than be completely replaced.

Market data and research company AlphaSense is betting on this approach by widely applying AI tools in its products. Chris Ackerson, SVP of Product at AlphaSense, told CNBC: “The future belongs to providers who combine advanced AI with trusted content, explainability, and deep domain expertise.”

Industry concerns predate the recent sell-off. As of Wednesday, hedge funds have shorted around $24 billion of software stocks this year. Short sellers borrow shares and sell them, aiming to buy them back later at lower prices for a profit.

This week’s sell-off shows that investors are reassessing which software companies can coexist with AI in the long term, and there are still deep divisions on the answers to that question.

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