AI shadow looms over the software industry: after a brief rebound, U.S. software stocks fall for seven consecutive days again

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The brief recovery of the software sector has come to an end, as the AI disruption threat continues to suppress valuations.

According to Bloomberg, the iShares Expanded Tech-Software Sector ETF (IGV), which tracks software stocks, was driven by several strong earnings reports at the beginning of this month, gaining 16% over three days and briefly turning positive for the year. But the rally ended on June 1, followed by seven consecutive trading days of decline, erasing all previous gains. IGV’s year-to-date loss now exceeds 12%, while the S&P 500 rose 7.9% in the same period, making the software sector the worst-performing industry.

Concerns about AI disrupting traditional software business models continue to suppress valuations. Anthropic’s release of the new Mythos AI model on Tuesday further intensified these sentiments, with IGV falling 2.8% that day. Mike Bell, Head of Strategy at RBC BlueBay Asset Management, said: “Even after this round of declines, there is further room for downside.”

The ongoing pressure on software stocks is fundamentally due to the rise of AI startups like Anthropic and OpenAI, which are undermining investors’ confidence in the moat of traditional software companies and compressing valuation multiples that previously led the tech sector. Bell bluntly stated: “This isn’t just about whether growth can be sustained, it’s a genuine existential threat—when AI itself can do these jobs, the associated products may not even need to exist anymore.”

Earnings Surprises Can’t Mask Structural Divergence, Adobe’s Report Faces Key Test

Despite overall pressure on the software sector, this earnings season’s data is not entirely pessimistic. Bloomberg data shows that 90% of software companies in the S&P 500 beat earnings expectations, compared to 82% across the broader market. Bank of America also noted in a June 8 research report that software businesses attending its recent Global Technology Conference displayed “consistent optimism across industries.”

At a stock level, Snowflake, Datadog, DigitalOcean, and JFrog all delivered strong results, demonstrating their solid positions in the software ecosystem. The cybersecurity sector has also performed well this year, becoming one of the few bright spots in the industry.

Against the backdrop of overall earnings surprises, the most closely watched earnings report this week comes from Adobe, which will be released after the market closes on Thursday local time. As a software giant serving creative professionals, Adobe is regarded as one of the companies most exposed to the risk of disruption by AI image generation technology.

Adobe’s share price has fallen 32% year-to-date, and post-earnings performance has historically been poor—of the last 11 earnings releases, 9 saw the stock price decline. Last quarter, long-time CEO Shantanu Narayen announced he would step down, raising further doubts about the company’s ability to successfully pivot to AI.

AI Giants Near IPO, Traditional Software Faces Capital Outflow

Potential IPO plans by OpenAI and Anthropic are seen as yet another source of pressure for traditional software stocks. According to reports, Anthropic could go public as early as October, while OpenAI is targeting a potential listing in the fall of this year.

Mike Bell, Head of Strategy at RBC BlueBay, believes these IPOs have a direct effect on traditional software stocks: “Investors want to avoid losers in the AI space, and overweight potential winners. Clearly, these companies are potential AI winners that people can invest in.”

By contrast, Fiona Ker, a fund manager at Ruffer, holds a relatively optimistic view on some software companies, especially those with large enterprise clients who, due to legal or compliance reasons, cannot easily switch vendors.

She said: “The boundaries of AI’s capabilities are shifting dynamically, which makes predicting sustainable growth extremely difficult. But from a valuation standpoint, these companies offer attractive free cash flow yields and valuation multiples below market averages, creating an appealing opportunity set. I believe the current pricing already fully reflects the uncertainty.”

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