Software Stocks in Freefall: Investors Weigh AI Disruption Against Bargain Hunt

NEW YORK, Feb 5 (Reuters) – The great software unwind is accelerating. A sector once synonymous with the bull market has become its epicenter of pain, with the S&P 500 software and services index plunging 13% in a single week—erasing over $800 billion in market value. The question now gripping trading desks is whether the collapse has opened a buying window or merely previews a deeper, AI-driven reckoning.

The rout, which has seen bellwethers like Intuit, ServiceNow, and Oracle tumble, marks the software group's worst three-month stretch relative to the broader S&P 500 since the dot-com bust in 2002, according to Evercore ISI. The trigger was a potent mix: anxiety over new AI advancements, like Anthropic's Claude model, and disappointing earnings from giants including Microsoft. This has crystallized a market-wide pivot, as capital flees high-flying tech for value and quality stocks in sectors like energy and industrials that had languished for years.

"This isn't just a correction; it's a fundamental reassessment," said James St. Aubin, CIO at Ocean Park Asset Management. "The market is waking up to the fact that AI won't just create winners—it will obsolesce entire business models. Valuations are catching up to that threat."

Yet, the sheer velocity of the decline has some seasoned managers sniffing for opportunity. Technical indicators suggest the group is deeply oversold, hinting at a potential near-term floor. "There's long-term value here, and prices are getting attractive," noted Jake Seltz, a portfolio manager at Allspring Global Investments, who has been adding selectively to names like ServiceNow. He, like many, awaits clearer catalysts—concrete evidence of AI-driven revenue or large-scale enterprise adoption—before committing more capital.

The divergence in strategy underscores a broader debate. For some, the selloff is a healthy rotation. "The right reason to sell expensive software isn't panic, but because there are better-valued opportunities elsewhere," argued Jim Masturzo of Research Affiliates. Others see a sector being unfairly tarred. Walter Todd of Greenwood Capital, who has made modest purchases recently, stated, "A wholesale replacement of existing software by AI isn't realistic. I think value is starting to emerge."

But caution reigns. Brad Conger of Hirtle, Callaghan & Co. is eyeing battered stocks like SAP and Adobe but isn't buying yet. "You could argue they're due a bounce," he conceded, "but I'm not comfortable that the worst is priced in." The shadow of last year's Deepseek-induced volatility looms, a reminder of how quickly AI narratives can reshape valuations.

"The market is repricing for a future where AI capabilities are better understood, and confidence in pure software growth is tempered," said Rene Reyna of Invesco. "Is it overdone? The fear is that selling begets more selling."

Market Voices: Reaction to the Rout

We asked several investors for their take on the software selloff:

• David Chen, Tech Fund Manager, San Francisco: "This is a necessary purge. Valuations had detached from the real-world implementation timeline of AI. The strong companies with clear monetization paths will recover; the rest were in a bubble."
• Marcus Thorne, Retail Investor & Software Developer, Austin: "It's pure panic. The narrative is running ahead of reality. My company isn't ripping out ServiceNow or Salesforce next quarter because of Claude. This is a classic overreaction creating a generational entry point."
• Anya Petrova, CIO, Legacy Wealth Partners, Boston: "The rotation is logical. Why chase expensive, uncertain disruption when you can buy stable cash flows in industrials at a discount? This is portfolio hygiene, not a tech apocalypse."
• Leo Grant, Financial Commentator & Podcast Host: "'Software-mageddon' is the perfect name. This is the moment the hype met the balance sheet. These CEOs have been selling AI fairy tales while their core businesses stagnate. The crash isn't just coming—it's deserved."

(Reporting by Lewis Krauskopf and Suzanne McGee; Additional reporting by Chibuike Oguh, Chuck Mikolajczak and Saqib Iqbal Ahmed; Editing by Megan Davies and Diane Craft)