MW Software ate the world. Now, Wall Street is worried AI will eat software.

By Joseph Adinolfi and Hannah Pedone

The selloff of business software continues on Wednesday as investors keep selling shares of companies that look like they could be on the menu

Software ate the world. Now, investors are worried software companies are on the menu as the advent of AI threatens business models.

For more than 15 years, business software steadily came to dominate every industry sector of the economy. The advancement of enterprise software was relentless.

This week, investors became very worried that rapidly-advancing AI capabilities offered by companies like Anthropic are going to pummel any company with services that include enterprise software.

Shares of big software-as-a-service players like Salesforce Inc. (CRM) and Adobe Inc. $(ADBE)$ have been struggling for months as investors focused on the risk that the advent of AI might render their businesses models obsolete. Both companies' shares saw some relief on Wednesday, though.

Over the past six months, software stocks have seen their worst performance relative to the broader S&P 500 on record, according to Dow Jones Market Data.

But markets internalized that shift to a new degree this week and punished any company associated with the space. On Tuesday, Anthropic unleashed nearly a dozen plugin tools for its Claude Cowork that pushed AI applications into areas like sales, legal and data analysis.

Investors quickly moved to sell shares of companies that looked like they could be on the menu. That included not just pure software-as-a-service companies, but also many longstanding business-services companies that had essentially transformed into software companies over the past decade.

The selloff began on Tuesday as information-services firms with legal exposure like Thomson Reuters Corp. $(TRI)$ and RELX PLC (RELX) slid. However, the selling soon spread to the IT sector more broadly, said Andrew Nicholas, an analyst at William Blair. The pain hardly let up on Wednesday; although Thompson Reuters shares bounced, RELX moved even lower.

Online legal-services providers have seen major declines this week, with shares of LegalZoom.com Inc. $(LZ)$ and CS Disco Inc. (LAW) sharply lower, FactSet data showed. IT services firms Capgemini SE (FR:CAP) and Infosys Ltd. (IN:500209) have also racked up big losses.

Software names were a major casualty, adding to pressure that they have faced since the summer. Software engineering company EPAM Systems Inc. $(EPAM)$ saw a very modest rebound on Wednesday after a double-digit drop the day earlier. Accenture PLC $(ACN)$ was in a similar boat, barely closing in the green on Wednesday after Tuesday's rout. Gartner (IT) added to its decline after falling more than 20% on Tuesday. News Corp. $(NWSA)$, which owns MarketWatch publisher Dow Jones & Co. along with professional data-services businesses, has also seen the selling gather pace.

"The indiscriminate selling across the sector indicates this is much more representative of a structural concern about the competitive positioning and moats of information-services names under this new AI paradigm" said Andrew Nicholas, an analyst with William Blair.

He added that in keeping with a "long-term" perspective, this week's selloff in S&P Global Inc. $(SPGI)$, Moody's Corp. $(MCO)$, Equifax Inc. $(EFX)$, TransUnion (TRU) and Verisk Analytics (VRSK) were "particularly irrational" as these companies have more viable business models to capture value from AI, compared to other professional-services companies.

Shares of asset managers involved in private lending were also caught up in the selling. Blue Owl Capital Inc. (OWL), a company that has become synonymous with the private-credit boom, saw its stock sink by more than 10% combined between Tuesday and Wednesday.

The new Claude Cowork launch accelerated a decline in the stocks of many of these alternative asset managers as investors shifted their focus away from their exposure to the ongoing AI data-center buildout, and toward the exposure to software names.

As Gina Martin Adams, chief market strategist at HB Wealth, pointed out, back in October and November, investors were laser-focused on potential threats to the AI trade. Concerns about circular lending, and the massive capital investment required to build data centers, were front of mind. But more recently, the disruptive potential of AI is back in focus.

"I think that's telling; at points in the cycle, it's difficult to distinguish between narrative and true fundamentals," she said. "The narrative yesterday was that AI is going to eat software."

A team of strategists at BofA Global Research pointed out that business development companies, the separate investment entities managed by private-credit firms like Blue Owl, are heavily exposed to the software space. Their analysis found that business development companies held about 25% of their total loan exposure in the technology sector.

"Software tends to be one of the top industry exposures for BDCs," the BofA strategists said in a written report.

Software ate the world

In 2011, Marc Andreessen, the software engineer who co-authored the first widely used web browser before becoming a prominent venture capitalist, famously wrote a Wall Street Journal column titled, "Why Software is Eating the World."

Andreessen essentially argued that companies in every industry, from agriculture to defence, were transforming into software companies.

His argument proved prescient. Since that column was published, companies that serviced just about every business industry became enterprise application software companies, with subscription business models that emphasized recurring revenue streams and the ability to borrow huge sums of money based on them.

In recent years, their stock prices commanded higher multiples as their margins expanded. But this week, many investors were starting to rethink whether those multiples were worth it.

AI disruption remains a major concern for executives across industries. A study conducted by the Conference Board back in October found that 72% of S&P 500 companies had flagged AI as a material risk to their businesses in their public disclosures, the BofA Global Research analysts pointed out.

When Andreesen wrote his essay, software stocks were beginning a yearslong ascent to the pinnacle of the U.S. equity market. For some names, that trend appeared to have peaked during the pandemic, when hot stocks associated with the boom in cloud-computing services - companies like Snowflake Inc. (SNOW) and Cloudflare Inc. (NET) - saw their valuations peak.

But over the past six months, selling has come for most software names. Even shares of Palantir Technologies Inc. (PLTR), which is at the forefront of the AI trend and was one of the best-performing stocks in the U.S. last year, have struggled. Palantir shares fell by more than 11% on Wednesday, FactSet data showed.

To some, the selling seems like it is getting ahead of itself.

Since then, the dominant narrative within the technology space has shifted toward favoring hardware companies - namely, companies in the semiconductor space - over firms that sell software as a service.

But given the relatively broad-based nature of the selling, some believe discerning stock pickers might be able to find opportunities amid the chaos. Joseph Shaposhnik, portfolio manager of the Rainwater Equity ETF, substantially reduced his exposure to software names over the summer, including selling most of his position in Constellation Software Inc. (CA:CSU).

Shaposhnik's fund focuses on companies with strong annual recurring revenue - a key feature of many software businesses.

"Software has become extremely important over the last 25 years - it's become much more important to the core operations of most businesses," Shaposhnik said. "But not all software is created equal. Some businesses are going to be affected more greatly than others. Some are going to become more efficient."

Others questioned whether investors selling these names might be getting ahead of themselves. Jordan Klein, an analyst at Mizuho said in a note on Wednesday that software results recently have been "solid," adding to confusion over the reasons for the selloff.

"Imagine what could [or] would happen to Software stocks if or when we get any real bad news, like a true growth slowdown or news of high-profile companies admitting AI is starting to have some negative on their core business. It would make the selling now look like child's play."

That said, the weakness in software stocks appears to be coloring Wall Street analysts' forecasts. A chart from Trivariate Research showed that revisions to the median sales and earnings estimates for software companies in the Russell 3000 have turned decidedly negative. That is a sign that the selloff in software names hasn't been purely sentiment-driven, Shaposhnik said.

Even as the pain from the software selloff spreads to other parts of the U.S. equity market, some traders cautioned that the selling was beginning to look overdone.

"Net net, I have never seen sentiment this negative in any group in my career. I think we're due for a vicious rally in software," said Michael Toomey, an equities trader and managing director at Jefferies, in commentary shared with MarketWatch.

In the Jefferies commentary, Toomey rattled off a list of reasons why he felt software names were likely due for a bounce. He included the fact that the iShares Expanded Tech-Software Sector ETF IGV has reached its most oversold level relative to the S&P 500 SPX in history.

Software companies even received a vote of confidence from Nvidia CEO Jensen Huang, who said during a public appearance earlier this week that he was surprised to see investors dumping software names en masse.

He called the idea that AI would replace software companies "the most illogical thing in the world, and time will prove itself," he said.

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February 04, 2026 17:02 ET (22:02 GMT)

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