Wall Street sees 'broken logic' in software stock selloff
As software stocks continue to get pummeled due to investor fears over AI disrupting the sector, Wall Street insiders are starting to question the reasons behind the selloff.
JPMorgan global investment strategist Kriti Gupta notes in a new report that the S&P 500 software index has fallen into a bear market with intense selling pressure because of the concerns that "software companies could become obsolete" due to innovations made by artificial intelligence.
"Investors are taking the disruption seriously," Gupta said.
These concerns seemingly came to a head after Anthropic recently released a new AI-powered plugin aimed at the legal industry that can automate contract review, NDA triage, compliance workflows, legal briefings and templated responses.
The release suddenly put enormous pressure on shares of companies that provide software as a service (SaaS), leading to a rout that caused software and service companies to lose about $300 billion in market value in one day last week.
"But if the view is that new AI companies are going to disrupt the entire software industry, why are stocks that should benefit from the disruption – like the hyperscalers that invested early in AI technology, chipmakers fulfilling demand from the infrastructure build and even the materials needed for the process – also down?" Gupta said.
"And therein lies the broken logic," she added. "The market is selling indiscriminately."
Goldman Sachs CEO David Solomon echoed Gupta's questioning of the logic behind the selloff in software stocks during a UBS Group AG conference in Florida on Tuesday.
“I think the narrative over the last week has been a little bit too broad,” he said. “There’ll be winners and losers — plenty of companies will pivot and do just fine.”
Meanwhile, JPMorgan strategists, led by Dubravko Lakos-Bujas, recommended in a note that investors look to increase their exposure to stronger software stocks, especially those positioned to be more resilient to AI disruption, because a rally from the lows is likely.
“Given the positioning flush, overly bearish outlook on AI disruption of software and solid fundamentals, we believe the balance of risks is increasingly skewed towards a rebound,” the team wrote.
Wedbush tech analyst Dan Ives told Bloomberg TV that "this structural sell-off in software is unlike anything I’ve ever seen" in his 25 years in the business.
But he also sees this as a perfect opportunity to buy the dip because he believes enterprise software stands to experience significant expansion through AI adoption, rather than being decimated by it.
“The heart and lungs of AI are going to be the use cases," Ives said. "So when you look at ServiceNow, Salesforce, they are going to play instrumental roles in the AI revolution.”
Gupta agrees the downturn has opened up a buying opportunity for investors, writing that "perhaps there is no rhyme or reason for the sell-off at all."
She compared it to the way AI stocks plummeted when China's DeepSeek was released in January 2025.
“If you believe that Claude Code is just another DeepSeek moment, current software valuations are worth a look in finding an entry point,” Gupta said.