‘No Motivation to Hold’: Software Shares Plunge Amid Concerns Over Latest AI Technology

Software Stocks Face a Challenging Start to the Year

Photographer: Michael Nagle/Bloomberg

At the beginning of the year, many investors hoped software stocks would rebound. Instead, the sector has experienced its most difficult opening in recent memory.

The debut of Anthropic’s new artificial intelligence tool on January 12 reignited concerns about technological disruption, putting additional pressure on software companies in 2025. Intuit Inc., the maker of TurboTax, suffered a 16% decline last week—its steepest drop since 2022. Meanwhile, Adobe Inc. and Salesforce Inc., known for their customer management solutions, each fell by over 11%.

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According to Morgan Stanley, a collection of software-as-a-service companies has dropped 15% since the start of the year, following an 11% decline in 2025. Bloomberg data indicates this is the weakest yearly kickoff since 2022.

Portfolio manager Bryan Wong of Osterweis Capital Management, which oversees $7.9 billion, commented, “The recent Anthropic announcement highlights just how hard it is to predict future growth. The pace of change is unprecedented, making the outlook more uncertain than ever.”

Anthropic’s Claude Cowork, introduced as a “research preview,” can generate spreadsheets from screenshots or draft reports from scattered notes, all powered by AI and developed at remarkable speed.

Although still in its early stages, this technology is exactly the kind of advancement that has made investors wary, reinforcing negative sentiment in the sector, according to Jordan Klein, a technology analyst at Mizuho Securities.

In a note to clients dated January 14, Klein wrote, “Many investors see no compelling reason to own software stocks, regardless of how undervalued they become. They believe there are currently no catalysts for a re-rating.”

The recent downturn has widened the gap between software firms and the broader tech industry. Worries about competition from emerging AI services are overshadowing the strong profit margins and recurring revenues that once made software stocks appealing to professionals.

While the Nasdaq 100 Index approaches record levels, companies such as ServiceNow Inc. are trading at multi-year lows. A key issue is that most software providers have yet to gain significant traction with their own AI products. Salesforce has promoted its Agentforce solution, but it hasn’t meaningfully boosted revenue. Adobe has added generative AI features to its creative software, but did not update certain AI-related metrics in its December earnings report.

Growth Prospects and Market Sentiment

Wong notes that established software companies benefit from strong distribution networks and access to data, but a return to growth is necessary for their stocks to recover—a scenario that doesn’t seem imminent.

Bloomberg Intelligence projects that earnings growth for software and services firms in the S&P 500 will slow to 14% in 2026, down from an estimated 19% in 2025. In contrast, other tech segments appear more promising.

Semiconductor Companies Outperform

Chipmakers like Nvidia Corp. are expected to see robust revenue growth, thanks to major investments in AI infrastructure by tech giants such as Microsoft, Amazon, Alphabet, and Meta. Bloomberg Intelligence forecasts that semiconductor stocks will achieve nearly 45% profit growth in 2025, accelerating to 59% in 2026.

Jonathan Cofsky, a portfolio manager at Janus Henderson Investors, explains, “Chipmakers are excelling because their fundamentals are improving and their growth outlook is clearer, given their customer base. In contrast, there’s much less clarity about how AI will reshape the software landscape.”

Valuations and the Path Forward

Software company valuations continue to fall. Morgan Stanley’s index of these firms is now trading at 18 times projected earnings for the next year—the lowest on record and far below the decade-long average of over 55 times.

Wong from Osterweis Capital observes, “Software companies previously commanded high multiples due to their subscription models and predictable recurring revenue. But with AI agents capable of working around the clock and completing large projects rapidly, it’s difficult to determine what valuation is appropriate.”

Despite these low valuations, some analysts believe the sector could be poised for a turnaround.

Barclays predicts that software stocks may finally see relief in 2026, as customer spending remains steady and valuations become more attractive. Goldman Sachs expects that increased AI adoption will expand the market for software companies. D.A. Davidson suggests that with market narratives overshadowing fundamentals, 2026 could be a good time for selective investment in the sector.

Chris Maxey, managing director and chief market strategist at Wealthspire, which manages $580 billion, says, “We can’t say the recovery has arrived, as concerns about AI’s impact will persist for some time. However, the sector is becoming more appealing. It’s not a clear buy yet, but we’re getting closer.”

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