Recent days have witnessed a sweeping sell-off storm in software stocks engulfing Wall Street. This week, concerns became particularly pronounced when Anthropic PBC unveiled a new productivity tool, triggering widespread declines in software, financial services, and even asset management stocks, subsequently dragging down the broader market. Short-sellers have reaped substantial profits from this wave, while concurrently, some market analysts argue the current panic is decidedly overblown.

This week, Anthropic, renowned for its Claude chatbot, quietly announced that its Cowork feature would introduce a plugin capable of "accelerating contract review, NDA screening, and internal legal team compliance processes." Wall Street's reaction was intensely severe, sparking a market rout that erased approximately $300 billion in value. Since the start of the year, fears that advancements in artificial intelligence technology will disrupt traditional software business models have led to an overall decline of about 20% in the share prices of software and AI-related companies.

For investors betting against this sector, however, this has turned into a veritable feast. According to data from S3 Partners LLC, this translates to paper profits of around $24 billion for those shorting the sector. "This is a phenomenon specific to the software sector; the broader 'Magnificent Seven' stocks are largely flat," wrote S3's head of research, Ihor Dusaniwsky, in a client note.

For months, as market worries intensified that AI could impair the core businesses of software industry firms, investors have been offloading software stocks. With the sell-off showing no signs of abating, short-sellers are increasing their bets against the sector, anticipating further declines ahead. Data from S3 Partners indicates that short interest is rising in stocks including Microsoft, Oracle, Broadcom, and Amazon. S3 data shows that short interest in Microsoft has surged 20% year-to-date, while Oracle has seen a 10% increase. Short positions in Broadcom and Amazon have also grown.

This marks a shift from the typical behavior of short-sellers during previous downturns, particularly concerning Microsoft's stock. "Historically, this software giant 'traded like a reversal stock, with shorts covering on the way down,'" Dusaniwsky said. "But now, it's trading like a momentum-driven, troubled stock, with shorts adding to their positions amid its weakness."

Amid the prevailing "software apocalypse" narrative on Wall Street, financial analyst Dave Lee offered a contrasting view, labeling the fervor as "quite absurd" and arguing that AI disruption fears are mistakenly punishing high-quality assets. On Tuesday, software stocks faced a comprehensive sell-off, with Jefferies analysts dubbing it "SaaS-geddon" – as if the market had finally "confirmed" long-held latent fears: even if these software companies don't face extinction, their profit margins are destined to be severely impacted.

However, both assumptions are premature. "This is the most illogical thing in the world," Nvidia CEO Jensen Huang commented on the sell-off. The market panic overlooks the reality of enterprise technology adoption: while general AI capabilities are improving, better AI does not equate to reduced demand for specialized software. Anthropic's AI can review legal documents, but it cannot replace the risk management, workflow integration, clear accountability, and system integration features inherent in tools specifically built for legal tasks. When problems arise, enterprises require a dedicated, on-call professional support team.

More importantly, for Anthropic itself, attempting to displace specialized software companies would be a self-defeating strategy; it is far more logical to convert them into customers. Rather than trying to disrupt large companies like the UK's Relx Plc or Ireland's Experian Plc – both caught in the sell-off – the fastest and most sustainable path to profitability is to sell AI technology to them, infusing new capabilities into their trusted services. The same logic applies to SAP, ServiceNow, and Synopsys.

Huang has expressed similar sentiments, stating, "There's a view that tools are fading, being replaced by AI. Do you use a screwdriver, or do you invent a new one?" Regarding the future of professional software, Canva provides a vivid example: this professional tool for designers integrates AI as a feature, not as the core product. Similarly, the programming platform Replit offers a far more comprehensive, all-in-one application development platform compared to Anthropic's Claude Code, yet it utilizes Anthropic's models at its foundation.

Dave noted that traders consistently overestimate technology companies' ability to solve highly specialized problems. But the market should recall the plunge in healthcare stocks when Amazon ventured into that sector, or the slump in grocery stocks when it announced plans to disrupt retail. A more classic example is the 20% single-day evaporation of Match Group's market value when Meta announced social dating features. AI might be different, potentially more disruptive, but that doesn't suddenly make similar knee-jerk reactions rational.

The software industry could indeed face disruption, much like the impacts once brought by the internet and mobile computing. But every disruption produces winners and losers. As JPMorgan analyst Mark Murphy put it, software stocks are being "sentenced without a trial." This panic mentality is contagious. Prior to this week's SaaS sell-off, the gaming sector witnessed a similar script: after Google announced its AI project "Genie," capable of generating interactive experiences in real-time, gaming companies collectively lost roughly $40 billion in market value. Take-Two Interactive's stock has fallen nearly 8% since then.

Furthermore, regardless of AI's potential to significantly enhance gaming companies' cost efficiency and creative ambitions, believing Google's generative tool could threaten the creative genius behind "Grand Theft Auto" is akin to firing Steven Spielberg because a new camera was invented. Dave reiterated that whether it's SaaS, gaming, or any industry affected by AI, the fundamental issue is this: Wall Street has not yet developed the mindset required for the AI era. The market overreacts with panic to bad news and with excessive euphoria to good news. Part of the reason lies in the overhyping by AI companies themselves – although even among AI's staunchest advocates, many find this "apocalyptic prophecy" targeting software utterly untenable.