The recent software sell-off in the stock market hit hard and escalated quickly.
It started with a morsel of news from Anthropic, the creator of the Claude AI chatbot. They were adding new legal tools to their Cowork assistant that could track compliance and review legal docs. No big deal.
Turns out it was a big deal. Legal-software stocks across Europe and the US got absolutely creamed on Tuesday. Contagion spread across the software sector like wildfire before spilling into broader tech. The pain continued on Wednesday.
While the market action was jarring, it was hardly surprising. Just a few months prior, OpenAI’s new internal software-as-a-service tools had triggered a similar meltdown in the space.
As the chart below shows, that was basically the top for software stocks. Now, another AI scare later, they sit at post-Liberation-Day lows, off nearly 30% from highs.
While software companies licked their wounds on Wednesday, with some industry execs limping on to CNBC to defend their besieged businesses, a debate raged over whether the software comeuppance went too far.
Nvidia CEO Jensen Huang certainly thought so, calling the AI-driven sell-off the “most illogical thing in the world.” JPMorgan Private Bank strategist Stephen Parker, meanwhile, said the sell-off in software was part of a healthy rotation towards more unloved parts of the market. One common argument that emerged was that software companies are too entrenched to be fully replaced.
Regardless of who’s right, software stocks have been marked by AI. No matter what they do going forward — even if they succeed — they will be judged against expectations of AI disruption.
“We are now in an environment where the sector isn’t just guilty until proven innocent, but is now being sentenced before trial,” Toby Ogg, an analyst who covers European software at JPMorgan, wrote in a client note.
But this is not solely a software-industry problem. Other sectors will find themselves in the crosshairs of AI at some point. As technologies evolve in potentially unforeseen ways, seemingly minor developments from developers are going to continue driving major fissures into entire industries.
Ultimately, investors find themselves in an era where part of the game is anticipating and gauging how AI impacts businesses of all types. And not just the day or two after cataclysmic product announcements. We’re talking weeks and months down the line, when single-company fundamentals have taken back over. Who is actually sustainable?
It’s a game of chicken that could create considerable volatility in the meantime. So buckle up.