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- The brutal wipeout in software stocks is getting even worse, in 3 charts (businessinsider.com)
Software Sector Sees Continued Slide, Enters Bear Market as AI Fears Mount
The software sector is experiencing a significant downturn, with stocks taking another hit on Wednesday, extending a brutal sell-off that began Tuesday. This persistent weakness has pushed the sector officially into a bear market, the worst slump since the “Liberation Day” market crash.
The iShares Expanded Tech-Software Sector ETF, a key indicator for the industry, shed another 2% on Wednesday. This follows a particularly severe Tuesday, where news of Anthropic’s new AI tool – capable of handling various legal administrative tasks – sent investors into a panic. Legal software companies were initially crushed, but the selling pressure quickly spread across the broader software space.
Wednesday saw several notable losers in the software market:
- AppLovin: -16%
- Palantir: -12%
- Varonis Systems: -11%
- Oracle: -5%
- Circle Internet Group: -2%
The tech-heavy Nasdaq Composite also felt the pain, dropping as much as 2% for a second consecutive day before selling activity began to temper in the afternoon.
At the closing bell on Wednesday, major indexes stood as follows:
- S&P 500: 6,882.72, down 0.51%
- Dow Jones Industrial Average: 49,501.30, up 0.53% (+260.31 points)
- Nasdaq Composite: 22,904.579, down 1.5%
This latest market turbulence comes after Microsoft’s recent earnings report last week, which fueled concerns about elevated valuations and increasing capital expenditures in AI, ultimately pushing the software sector into bear market territory.
Investors are grappling with two primary concerns. Firstly, tech stocks are broadly considered expensive, and anxieties about a potential “AI bubble” continue to loom large over the markets. Secondly, there’s significant uncertainty surrounding how the core business models of software companies might evolve in the face of rapidly advancing AI technologies.
Craig Johnson, a managing director and chief market technician at Piper Sandler, highlighted these concerns, noting that investors are questioning whether these are “existential threats” to certain companies or if they will ultimately adapt to the new technological landscape. Adam Parker, founder of Trivariate Research, echoed this sentiment, suggesting that if AI can generate code and perform tasks currently handled by software, it’s “impossible to believe that there won’t be benefits for customers removing some of the software.”
Michael Brown, a senior research strategist at Pepperstone, described Tuesday’s sharp sell-off as “just a manifestation of the worries that market participants have had for quite some time.”
The current weakness is not an isolated incident but rather a continuation of a year-long struggle for software stocks. The iShares Expanded Tech-Software Sector ETF is now 27% below its September 2025 peak, officially marking a bear market.
Valuations in the sector have also plummeted. The price-to-earnings (P/E) ratio within the S&P software index has fallen below 60x, a significant drop from its peak of around 85x last summer.
Among the worst performers in the sector are Oracle, Varonis, CommVault, and Circle, all of which have seen their stock prices decline by more than 50% from their September highs.
The outlook for software on Wall Street remains divided. Pepperstone’s Brown maintains a bullish stance on tech generally, citing strong earnings growth expectations for the S&P 500, which is projected to see 12% earnings growth for the fourth quarter. He advises investors to “buy the dip,” believing the market’s path of least resistance is upward.
However, Piper Sandler’s Johnson suggests that most software stocks have more room to fall from a technical perspective, potentially another 10%-20% before finding a floor. He noted that major players like CRM, ServiceNow, Oracle, DataDog, and Snow have yet to correct to “identifiable support levels.”
Trivariate Research’s Adam Parker believes the software sector will remain in a “guilty until proven innocent mode,” with investors punishing companies until they demonstrate stronger earnings growth. He added, “What the market’s telling you is that the analyst estimates are way too high… I feel like it’s a falling knife that I don’t want to catch personally.”
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- The brutal wipeout in software stocks is getting even worse, in 3 charts (businessinsider.com)