Largest decline since April last year, NASDAQ "two consecutive drops": software "caught fire," chips "suffered," technology "plunged"

Wall Street’s concerns about the software industry are rapidly evolving into a broader sell-off across the tech sector, as market panic spreads from the SaaS segment to semiconductors and AI infrastructure, significantly increasing pressure on tech stocks.

On Wednesday, the Nasdaq Composite not only declined again but also experienced its first two consecutive days with a 1% drop since April last year. The core trigger for this volatility is the wavering investor confidence in the outlook for the software industry.

Following the release of a series of new industry-specific tools by startup Anthropic, capable of performing legal contract reviews and other functions, the sell-off in SaaS stocks accelerated. Market concerns are growing that AI’s impact on existing software business models could be far beyond expectations, while doubts are also rising about whether tech giants can deliver on profit promises under high valuations.

However, Baird Private Wealth Management market strategist Michael Antonelli pointed out that this phenomenon more reflects traders adjusting their positions rather than a fundamental reassessment of the overall market outlook.

“What does Nvidia have to do with SaaS? People are taking profits on some profitable stocks to offset their heavy losses in software stocks.”

It’s worth noting that although traders say the sell-off remains orderly and there are no signs of panic-driven crashes, high valuations make the market extremely sensitive to any negative signals, and current funds are rapidly rotating from tech stocks into traditional sectors.

High Valuations Amplify Market Reactions

Wednesday’s market performance showed that the decline extended beyond just the software sector. After disappointing earnings reports, AMD’s stock plummeted 17%, marking its worst single-day performance since 2017.

Meanwhile, Palantir fell 12%, and data storage company SanDisk dropped 16%. This wave of selling in SaaS stocks also affected several AI giants, with Meta down 6.6% this week and Nvidia down 8.9%.**

Cresset Capital Chief Investment Strategist Jack Ablin stated that, given current valuation levels, the market’s reaction is bound to be very severe, “Expectations are very, very high right now.”

Senior Managing Partner Jonathan Corpina of Meridian Equity Partners also noted that, considering the high valuations of tech stocks, the speed of sector rotation will be faster than in the past. “If you’re trading in this market, you have to be quick in and out because the pain can come quite fast.”

This pain has even extended beyond the stock market. According to PitchBook LCD data, as of Tuesday, the average price of loans to software companies has fallen from 94.71 cents at the end of last year to 91.27 cents.

The extra yield (spread) investors require to hold software loans jumped to 5.95 percentage points at the end of January. Additionally, about $25 billion worth of software loans are in distress (trading below 80% of face value), accounting for nearly one-third of all distressed loans.

AI Impact and Overreaction Debate

Market volatility reflects investors re-evaluating companies facing potential AI disruption risks.

JPMorgan Chase analyst Toby Ogg said that the software industry is currently in a “pre-judgment” situation. This concern stems from the rapid adoption of AI technology, even though for many companies, AI is still in early stages, but software firms are considered to have the greatest risk exposure.

However, industry executives and some strategists believe this sell-off may have already gone too far. Nvidia CEO Jensen Huang warned at a Cisco event that recent software stock sell-offs have been overhyped.

“There’s a huge amount of software stocks under immense pressure just because of some ‘AI will replace them’ narrative, which is the most illogical thing in the world.”

Antonelli from Baird also shares a similar view, believing that companies won’t easily abandon large enterprise software and switch to “some code hammered out in a back room in Oakland.” He added that the market often “shoots first and asks questions later” on expensive stocks.

Accelerating Capital Rotation: From Tech Giants to Traditional Sectors

Despite the heavy hit to tech stocks, this is not a broad market collapse but rather a clear sign of capital rotation. Investors have continued the trend seen over the past few weeks, pulling funds from long-term winners like chip stocks and large tech giants and reallocating into more traditional sectors.

On Wednesday, with funds flowing into companies more directly linked to accelerating economic growth, 7 out of the 11 sectors in the S&P 500 rose. Energy, materials, and consumer staples have all gained at least 12% so far this year.

Notably, despite the S&P 500 closing down 0.5%, 92 stocks hit 52-week highs during the day, the most since November 2024.

Tom Bruni, head of market and retail insights at social platform Stocktwits, commented that this kind of trading is already happening, and the news this week just gave the market a real reason to accelerate this trend.

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        The market carries risks; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk.