Software stocks experienced a brutal two-day sell-off, with the iShares Expanded Tech-Software Sector ETF losing 2% on Wednesday following an even more severe decline on Tuesday. The catalyst for this market turmoil was Anthropic’s announcement of a new AI tool capable of performing clerical and administrative tasks for legal professionals, sparking fears about AI’s disruptive potential across the software industry.
Major software companies saw devastating losses: AppLovin plummeted 16%, Palantir dropped 12%, Varonis Systems fell 11%, Oracle declined 5%, and Circle Internet Group lost 2%. The tech-heavy Nasdaq Composite tumbled 1.5%, marking its second consecutive day of significant losses. The S&P 500 closed down 0.51%, while the Dow Jones managed a modest 0.53% gain.
The software sector has officially entered bear market territory, having crossed that threshold last week. The iShares Expanded Tech-Software Sector ETF now sits 27% below its September 2025 peak, representing the sector’s worst performance since the “Liberation Day” market crash. This decline reflects mounting investor concerns about AI’s potential to fundamentally reshape or eliminate traditional software business models.
Valuations have collapsed dramatically across the sector. The price-to-earnings ratio for the S&P software index has plunged to below 60x, down sharply from approximately 85x last summer. The hardest-hit stocks—Oracle, Varonis, CommVault, and Circle—have all declined more than 50% from their September highs.
Market analysts identify two primary fears driving the sell-off: First, tech stocks remain broadly expensive amid persistent concerns about an AI bubble. Second, there’s profound uncertainty about how AI will transform software companies’ business models. Craig Johnson from Piper Sandler noted that investors are grappling with whether these represent existential threats or opportunities for adaptation.
Wall Street remains divided on the outlook. While some analysts like Michael Brown from Pepperstone maintain a “buy-the-dip” mentality, citing strong earnings and economic growth, others are more cautious. Technical analysis suggests most software stocks could fall another 10%-20% before finding support levels, according to Johnson.
Key Quotes
Investors believe that ultimately, look, if three years from now you’re going to be sitting on your desktop asking your desktop to generate code to do certain things for you, it’s impossible to believe that there won’t be benefits for customers removing some of the software.
Adam Parker, founder of Trivariate Research, articulated the core existential threat facing software companies: AI assistants could eliminate the need for many traditional software products entirely, fundamentally disrupting the industry’s business model.
I think it’s just a manifestation of the worries that market participants have had for quite some time.
Michael Brown, senior research strategist at Pepperstone, explained that Tuesday’s massive sell-off wasn’t a sudden panic but rather the culmination of long-standing concerns about AI’s impact on software valuations finally coming to a head.
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.
Adam Parker warned that software stocks would remain in “guilty until proven innocent mode,” with the market punishing companies until they demonstrate they can maintain earnings growth in an AI-disrupted landscape, suggesting further downside ahead.
Our Take
This sell-off marks a watershed moment in the AI revolution’s impact on traditional tech. While much attention has focused on AI’s potential to disrupt blue-collar work, the Anthropic announcement demonstrates that white-collar software jobs and the companies serving them are equally vulnerable. The market is essentially conducting a brutal stress test: which software companies offer genuine value that AI can’t replicate, and which are simply expensive intermediaries that AI will eliminate?
The 27% decline from recent peaks suggests investors are fundamentally repricing the entire sector for lower growth and margin compression. What’s particularly striking is the breadth of the sell-off—from enterprise giants like Oracle to specialized players like Varonis—indicating this isn’t about individual company execution but rather systemic disruption. The next 6-12 months will likely separate survivors who successfully integrate AI from those disrupted by it, making this a defining period for the software industry’s future structure.
Why This Matters
This sell-off represents a critical inflection point for the software industry as markets grapple with AI’s disruptive potential. The Anthropic announcement crystallized long-simmering fears that AI agents could automate away entire categories of software products, fundamentally threatening traditional SaaS business models that have dominated tech for decades.
The magnitude of the decline—with the sector in official bear market territory and top stocks down 50%+ from recent highs—signals that investors are repricing software companies for an AI-native future. This isn’t just about short-term volatility; it reflects genuine uncertainty about which companies will thrive and which will become obsolete as AI capabilities advance.
For businesses and workers, this market reaction foreshadows broader economic disruption. If AI can automate legal clerical work today, what other white-collar functions are next? The implications extend beyond stock prices to employment, productivity, and competitive dynamics across industries. The divergence between AI infrastructure companies and traditional software firms suggests a fundamental reshaping of the technology landscape, with capital flowing toward AI enablers rather than legacy software providers.