Traders Dump Software Stocks as AI Fears Erupt

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Wall Street has been skeptical about software stocks for a while, but sentiment has gone from bearish to doomsday lately with traders dumping shares of companies across the industry as fears about the destruction to be wrought by artificial intelligence pile up. The anxiety was underscored Tuesday after AI startup Anthropic released a productivity tool for in-house lawyers, sending shares of legal software and publishing firms tumbling. “We call it the ‘SaaSpocalypse,’ an apocalypse for software-as-a-service stocks,” said Jeffrey Favuzza, who works on the equity trading desk at Jefferies. “Trading is very much ‘get me out’ style selling.” Bloomberg Intelligence Senior Global Head of Technology Research Mandeep Singh joins Bloomberg Businessweek Daily to discuss. He speaks with Carol Massar and Tim Stenovec.  Tech stocks pushed US equites lower as traders assessed the damage from the artificial intelligence-driven selloff in software firms and poured over the latest earnings reports. The Nasdaq 100 Index slumped 1.6% at 12:03 p.m. in New York falling as much as 2% earlier in the day. Advanced Micro Devices Inc. plunged following an underwhelming earnings report. The S&P 500 Index fell 0.4%. The Cboe Volatility Index hovered near 19. “This is a rotation, not a rupture,” said Mark Hackett, chief market strategist at Nationwide. “Tech is stepping back as cyclical and defensive stocks step up, and while Tuesday’s volatility caught attention, the data points to a technical reset, not a fundamental break. Seeing that shift near record highs highlights the market’s underlying strength.” A rotation out of software stocks showed little sign of abating on Wednesday as investors worried about business risks they face from better AI tools. The iShares Expanded Tech-Software Sector ETF dropped 2.3%, with AppLovin Corp. and Unity Software Inc. being among the biggest decliners. “AI is not being abandoned by markets,” said Charu Chanana, chief investment strategist at Saxo. But “it is being priced more carefully.” Weakness in software stocks points to lingering fears of disruption by newly-released tools from Anthropic PBC. Products including Claude Code and Cowork illustrate that AI is moving beyond web-based chatbots and into algorithms that can automate a slew of enterprise workflows. Kathleen Brooks, research director at XTB, sees software stocks remaining under pressure in the near term. However, she stresses that it is “not all bad” for the AI supply chain. “Memory and chip makers will be necessary to power Anthropic’s latest tools and the others that come after it,” said Brooks. “The AI trade is not moving in unison in 2026, and idiosyncratic factors may continue to drive stocks in the short term.” Instead of trading in unison, traders are “getting picky about which companies they want exposure to,” she added. The risk goes beyond just software, however. Bank of America analyst Ebrahim Poonawala noted that financials stocks that were viewed as exposed to software names sold off sharply given potential risk to earnings. He also stressed the need to be cautious. “While the AI-led disruption risk and its timing are debatable, investors would need to be alert to this when assessing downside risks to revenue growth and credit quality outlooks for the banks,” Poonawala wrote in a note published on Wednesday.  Poonawala highlighted a Conference Board study released in October, which said 72% of companies on the S&P 500 had flagged AI as a material risk in their public disclosures — up from 12% in 2023. But while the news for software stocks “gets worse by the day,” Miller Tabak’s Matt Maley sees a recovery on the horizon for the sector. “No matter where they are headed over the intermediate and long-term, they are getting poised for a nice bounce over the near-term,” Maley said. “It might not begin exactly today but investors should be careful about negative bets over the short-term.” -------- Watch Bloomberg Radio LIVE on YouTube Weekdays 7am-6pm ET WATCH HERE: http://bit.ly/3vTiACF Follow us on X: https://twitter.com/BloombergRadio Subscribe to our Podcasts: Bloomberg Daybreak: http://bit.ly/3DWYoAN Bloomberg Surveillance: http://bit.ly/3OPtReI Bloomberg Intelligence: http://bit.ly/3YrBfOi Balance of Power: http://bit.ly/3OO8eLC Bloomberg Businessweek: http://bit.ly/3IPl60i Listen on Apple CarPlay and Android Auto with the Bloomberg Business app: Apple CarPlay: https://apple.co/486mghI Android Auto: https://bit.ly/49benZy Visit our YouTube channels: Bloomberg Podcasts: https://www.youtube.com/bloombergpodcasts Bloomberg Television: https://www.youtube.com/@markets Bloomberg Originals: https://www.youtube.com/bloomberg Quicktake: https://www.youtube.com/@BloombergQuicktake