Concerns about artificial intelligence replacing traditional software finally triggered substantial panic selling in markets this week.

On Tuesday, the European software sector suffered a severe blow, with German software giant SAP's stock plummeting as much as 7.1%, wiping out nearly 220 billion euros in market value and marking its largest single-day decline since late 2020. France's Dassault Systèmes, UK's Sage Group, and others fell across the board, with multiple software stocks having accumulated double-digit declines since mid-July.

This selling wave is closely tied to the impact of AI model iteration speeds. Last week, OpenAI released the next-generation GPT-5, and just days ago, Anthropic also launched a specialized Claude version for financial services. Fund managers warn that the capability improvements of new models are sufficient to threaten the core businesses of some software and data service companies—including financial data providers, data analytics platforms, and even some enterprise applications.

Aviva Investors fund manager Kunal Kothari noted that Claude's financial version directly impacts business models like LSEG that rely on data provision, stating "The market is beginning to realize that each generation of GPT or Claude iteration could have multiple times the capability of the previous generation, challenging entire business logic."

"AI Devours Software" Narrative Gains Popularity Again

In reality, "AI devours software" is not a fresh perspective. As early as 2017, NVIDIA CEO Jensen Huang predicted that AI would change the software industry landscape. However, following GPT-5's release, reactions from Wall Street and European investors appear unprecedentedly real.

RBC Capital Markets analyst team stated that "software sector valuations continue under pressure, with volatility expected to persist in the short term," as the market is dominated by the narrative that "AI will lead to software extinction."

This sentiment has also spread to US markets. On Monday, US cloud-based work collaboration platform Monday.com plunged 30%, while Salesforce and Adobe have fallen more than 25%-30% year-to-date. A basket of software stocks' performance relative to the semiconductor sector has retreated to its lowest point since January.

The core market concern is that as AI coding and generative application capabilities improve, enterprises may build needed tools in-house, thereby reducing procurement spending on traditional "packaged software." Meta CEO Mark Zuckerberg even predicted earlier this year that AI engineering agents with "mid-level engineer" capabilities could emerge by 2025.

High Valuations Amplify Impact

This round of European software stock declines has an amplifier—high valuations.

Currently, the STOXX 600 average P/E ratio is about 17 times, while SAP's P/E ratio approaches 45 times. UBS O'Connor Chief Investment Officer Bernie Ahkong pointed out that "high valuations make them exceptionally sensitive to any potential negative news."

However, some institutions believe this panic selling may create opportunities. Ahkong stated: "Some companies may ultimately turn AI into profitable tailwinds, but it takes time to prove this."

Not All Software Will Be Replaced

Despite the "AI devours software" slogan making noise in markets, some investors and analysts remind that the software industry is not one-size-fits-all.

Lazard Asset Management's Steve Wreford believes that enterprises deeply embedded in customer workflows with hard-to-replicate proprietary data still possess strong moats. Schroders' Paddy Flood also noted that enterprise-critical applications are less likely to be impacted due to high switching costs and the importance of service stability.

Aviva's Kothari cited the example of UK credit agency Experian, which not only owns unique data but is also deeply embedded in financial institution business processes, stating "lending is inseparable from it."

However, Kothari also warned that relying solely on data barriers may not be safe enough—AI might seize control of more segments in the data value chain.

Over the past half-century, companies like Microsoft and SAP built the golden age of business software. But after GPT-5, the market is feeling for the first time that AI iterations may not just enhance productivity tools, but could fundamentally reshape the software industry's business models.

As one fund manager said: "Maybe in 10 years, AI will indeed devour parts of software, but the market is already starting to price in this risk in advance."