Software and service stocks are being sold off: market value evaporates nearly $1 trillion, with AI as the "behind-the-scenes driver"

Tech Home, February 5 — According to Reuters, investors are assessing whether this week’s sell-off in global software stocks has been excessive, while weighing whether related companies can withstand the existential threats posed by artificial intelligence. The conclusion is: it remains unclear, but the development of AI will inevitably be accompanied by market volatility.

On Tuesday, the S&P 500 Software and Services Index plummeted nearly 4%, experiencing widespread selling; on Wednesday, the sector declined another 0.73%, marking six consecutive trading days of decline, erasing approximately $830 billion (IT Home note: approximately 5.77 trillion RMB at current exchange rates) in market value since January 28.

In recent months, software stocks have remained under pressure, as AI has shifted from a growth booster to a potential disruptive force for many software companies. The latest wave of selling was triggered by a new legal tool launched as a plugin for Claude, a large language model developed by AI company Anthropic.

This tool is a plugin for the Claude AI, capable of handling tasks across legal, sales, marketing, and data analysis fields, highlighting the trend of large language models penetrating application layers. Large model vendors are aggressively entering lucrative enterprise markets to generate revenue and support their massive R&D investments. Investors worry that if this model succeeds, it could cause devastating impacts across industries such as finance, law, and programming.

This strategic deployment of large language models and their potential impact on established companies evoke the development path of Amazon: from a niche online bookstore to building a retail, cloud computing, and logistics empire that disrupted multiple industries.

However, some analysts point out that these AI large language models are far from a guaranteed victory, mainly because they lack the core specialized data that industries rely on to operate. They say that this sell-off reflects investors’ urgent need to rebalance portfolios and hedge risks — the rapid iteration of AI technology has made company valuations and business prospects beyond the usual 3 to 5-year forecasts, becoming increasingly unpredictable.

James San Obin, Chief Investment Officer at Ocean Park Asset Management in Santa Monica, California, stated, “This wave of selling can be traced back to the last quarter, essentially signaling that the market is awakening to the disruptive power of AI. As competition among AI-generated products intensifies, the seemingly broad economic moat of these software companies is now becoming precarious. Perhaps the market overreacts, but the threat is real, and company valuations must factor in this risk. My biggest concern is that this phenomenon is a warning sign of an impending crisis in the labor market.”

Recently, the market has fully demonstrated this trend: Thomson Reuters, which owns the Westlaw database, fell for seven consecutive trading days, dropping nearly 16% on Tuesday and rebounding slightly by 2% on Wednesday; MSCI, the global index provider, fell about 7% the previous trading day and declined another 1.8% on Wednesday. UK’s LSEG (London Stock Exchange Group) plunged 14% on Tuesday and continued to fall 1.3% on Wednesday; the previous trading day, the London Stock Exchange itself plummeted nearly 13%, with a slight 0.1% dip on Wednesday. The S&P 500 Software and Services Index has fallen nearly 13% over six days, down 26% from its October high last year.

The software sell-off on Wednesday further intensified but failed to attract bottom-fishing funds. The usual buy-the-dip activity that often rescues tech stocks from sharp declines was completely absent this time.

The decline in software stocks also triggered widespread chain reactions.

Oppenheimer analysts noted in a research report that concerns over “software sector weakness potentially posing credit risks to alternative asset management firms” led to a decline of 3% to 11% in asset management companies such as Apollo Global Management, Ares Capital Management, Blackstone, Blue Owl, Carlyle Group, and Kohlberg Kravis Roberts on Tuesday; on Wednesday, their stock prices rebounded slightly, gaining between 0.2% and 5%.

Ares executive Cott Schnabel said during a conference call on Wednesday that, “Only a very small number of companies in our portfolio at Ares Capital may be impacted by disruptive forces, and this is an area we are currently focused on and assessing.” He added that core enterprise software businesses do not face related risks.

The software stock plunge dragged down the broader market: the S&P 500 fell 0.51%, and the Nasdaq Composite dropped 1.51%. Many tech stocks declined due to AI-related concerns, with Nvidia down 3.4%, Meta down 3.2%, Alphabet down 2%, and Oracle down 5.1%.

Bill Strazullo, Chief Market Strategist at Boston Bell Curve Trading, said, “I believe this round of software stock sell-off has not bottomed out, and the market has already begun to top out, with downside risks outweighing upside potential.”

Some analysts and experts believe it is premature to declare a decline for global software and data companies. On Tuesday, Nvidia CEO Jensen Huang said concerns that AI will replace software and related tools are “illogical,” and “time will prove everything.”

JPMorgan’s head of U.S. enterprise software research, Mark Murphy, said that believing a new large model plugin could “replace all levels of mission-critical enterprise software” is “a logical leap.”

The software industry is considered highly susceptible to disruptive shocks because tools like Claude are gradually automating routine tasks that have long maintained pricing power in the industry.

Tally Rege, Chief Market Strategist at Wealth Consulting Group, stated, “I believe the software sell-off has gone to an extreme, and the logic behind it is flawed. As AI tools continue to iterate and upgrade, wouldn’t that reduce R&D costs, make it easier for developers to create better new software applications, and thereby increase profit margins for software companies?”