AI impact expectations loom, software stocks face renewed sell-off, industry ETF drops nearly 5% intraday, hitting lowest point in over two years.

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Against the backdrop of accelerated AI technology adoption, software stocks came under pressure again on Thursday, becoming one of the few significantly weak sectors even as the broader market moved higher.

Market data shows that the software stock ETF iShares Expanded Tech-Software Sector ETF (IGV) opened lower and continued to fall throughout Thursday, with midday losses widening to over 4.7%. It is poised to decline for the second consecutive day and set a new closing low since November 2023. Since the start of the year, the ETF’s cumulative loss is nearly 30%.

Correspondingly, SaaS-related indices saw even bigger losses, falling more than 5% in a single day, with weekly losses nearing 10%, and year-to-date declines close to 40%.

Among individual stocks, major software firms and high-growth names generally weakened: ServiceNow and Palantir fell over 8% midday, Workday was down over 6% intraday, Salesforce dropped more than 5%, Oracle fell more than 4%, and Microsoft nearly 3%.

Structurally, companies with high valuations and those relying on continued subscription growth suffered larger drops, indicating capital is prioritizing exits from those most sensitive to future growth expectations.

Intensive catalysts: Anthropic and Meta intensify market anxiety

One direct trigger for this round of selling is the latest AI developments which further reinforce the “replacement expectation.”

On Wednesday, OpenAI rival Anthropic launched Claude Managed Agents, aiming to let AI directly take over complex workflows. On the same day, Meta released a new generation of powerful AI models. The market interprets these developments as AI moving from auxiliary tools to “executors,” directly competing with traditional software.

In this context, the uncertainty surrounding future customer demand structure and business models for software firms has risen significantly.

AI “replacement logic” shakes growth narrative, software stock valuations reassessed

The market generally attributes the recent decline in software stocks to a core logic: the rapid development of generative AI and AI agents is disrupting the foundation of traditional software business models.

Media reports that investors worry AI services might weaken the demand base for traditional software vendors, thereby compressing their long-term growth prospects and pricing power.

Especially noteworthy, AI agents capable of independently completing multi-step tasks are seen as a direct threat to the SaaS model. Such tools may reduce enterprises' dependence on multiple software subscriptions, reshaping the entire software industry value chain.

Kevin Caron, Co-Chief Investment Officer of Washington Crossing Advisors, stated:

“A threat has appeared in today's environment that didn’t exist before, and expectations about future growth have been completely shattered. Before AI, no one truly worried that software would be replaced. Now, all companies' moats need to be re-evaluated.”

Fundamentals still stable, but sentiment dominates short-term pricing

Software stocks have seen sharp price corrections, but the overall fundamentals have not deteriorated in tandem.

Data shows that market profit expectations for the software industry are still being revised upward: expected sector profit growth in 2027 is 16.5%, higher than the previous 15.7%; revenue forecasts show similar trends.

Meanwhile, valuations have clearly declined, with the sector’s current expected P/E ratio at roughly 20.6x, significantly below the ten-year average of 34x.

Some institutions believe this combination of “solid fundamentals + valuation correction” implies that the market is mainly trading on sentiment and long-term uncertainty, rather than short-term earnings deterioration.

“Valuation slashing” continues, divergences begin to appear

While short-term capital continues to leave the software sector, market views on the industry are becoming increasingly divergent.

On one hand, the structural shock from AI has not been fully priced in, and the software industry’s business models may face fundamental reconstruction; on the other hand, strong corporate cash flows and stable balance sheets are shifting some capital to focus on “oversold opportunities.”

Institutional opinions hold that software companies still possess traits of “high profits, high cash flow, low debt,” and as long as fundamentals haven’t significantly worsened, sustained sharp declines may provide entry points for medium- and long-term investors.

However, against the backdrop of intensifying AI narratives, the software sector’s valuation restructuring is not yet over in the short term. The market is likely to keep oscillating between “growth certainty” and “technological disruption risk.”

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