AI Anxiety Triggers Market Avalanche: Tech Stocks Plunge as Fears Shift From Hype to Displacement

(MarketWatch) -- The artificial intelligence revolution, once Wall Street's golden goose, is now showing its disruptive teeth. A brutal, two-day market plunge has wiped out hundreds of billions of dollars from technology valuations worldwide, signaling a profound shift in investor sentiment from unbridled optimism to tangible anxiety about corporate survival.

The trigger appeared deceptively niche: AI startup Anthropic's release of a new legal document review tool. Yet, in the context of a relentless year of AI advances, this announcement acted as a catalyst, crystallizing a latent fear. Investors are no longer just asking who will profit from AI; they are urgently asking which long-dominant companies will be rendered obsolete by it.

"The narrative has flipped," said Michael O'Rourke, chief market strategist at Jonestrading. "For years, we discussed AI's potential. Now, we're witnessing its practical encroachment. This isn't an overreaction; it's a recalibration."

The sell-off was both swift and broad. An iShares ETF tracking software stocks has shed nearly $1 trillion in value over the past week. The pain extended beyond equities to credit markets, with over $17.7 billion of U.S. tech company loans falling to distressed levels. The contagion spread globally, hitting London's LSEG, India's Infosys and Tata Consultancy, and Asian tech hubs from Seoul to Tokyo.

Adding fuel to the fire, even perceived AI winners showed cracks. Alphabet signaled higher-than-expected AI capital expenditures, while Arm Holdings issued a disappointing revenue forecast—hinting that the cost of the AI arms race may be rising faster than immediate returns.

"It started with software, but fear is a contagion," noted Gil Luria, managing director at D.A. Davidson. "Now we're selling everything. Negative momentum builds on itself."

Analysts point out that the threat, for now, remains more speculative than material. Giants like ServiceNow and Salesforce haven't reported lost customers to AI rivals. However, the specter of displacement looms large. Many legacy software firms' own AI initiatives, like Microsoft's Copilot with 15 million paid users, have yet to achieve transformative scale, leaving them vulnerable to more agile, AI-native competitors.

"This is the early stage of a great market repositioning," said Dec Mullarkey of SLC Management. "The year ahead will separate the truly resilient from the vulnerable. The question is no longer 'if' but 'how fast' this reshuffling occurs."

Market Voices: Reaction & Analysis

Eleanor Vance, Portfolio Manager at Horizon Capital: "This is a healthy, necessary correction. Markets were pricing AI as a pure top-line growth lever. Now they're pricing in existential risk. It separates the wheat from the chaff and creates opportunities in companies building defensible moats."

David Chen, Fintech Analyst at Clearwater Research: "The speed of the sell-off is algorithmic, but the cause is fundamental. Anthropic's legal tool is a canary in the coal mine. If AI can reliably handle complex, regulated work like legal review, what's next? Accounting? Strategic consulting? The addressable market for disruption just expanded dramatically."

Marcus Thorne, independent investor and newsletter author: "It's sheer panic and hypocrisy. For years, these same funds poured money into anything with 'AI' in the pitch deck, inflating a massive bubble. Now, at the first sign that the technology might actually *do* something, they run for the hills. They weren't investing in innovation; they were chasing a trend. Main Street investors are left holding the bag."

Dr. Amara Singh, Technology Ethicist at Stanford University: "The market is finally grappling with the real-world implications we've long discussed in academia. This isn't just about stock prices; it's about the societal and economic restructuring AI will force. The volatility reflects a lack of preparedness, both corporate and regulatory, for the pace of change."

--Reporting by Esha Dey, Matt Turner, Alicia Tang and Kurt Schussler.

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