"Software stocks doomsday" ignites a major transformation! After panic selling, the market will embrace the "software cornerstone" of the AI era.

The pessimistic narrative of the “Software-mageddon” sweeping global stock markets is still fermenting like a snowball. The series of AI tools/agent-based AI collaboration platforms launched by Anthropic, known as a “formidable rival to OpenAI,” has triggered a broad sell-off in the global SaaS subscription software sector and the broader software industry. During Thursday’s US trading hours and Friday’s Asian session, this wave of selling continued to sweep through the software field, with the S&P 500 index briefly falling below its 100-day moving average. Of the 11 major sectors in the index, 9 declined, and the ETF tracking the S&P 500 software and services companies plummeted by 5%.

The software sector in the US stock market experienced its worst sell-off since 2022 this past Wednesday, with the magnitude of the plunge even surpassing last January’s tech sell-off following DeepSeek’s emergence. Since late October’s recent high, the S&P 500 Software & Services Index has fallen about 30%, and on Thursday, it headed for an eighth consecutive day of decline—by contrast, the overall S&P 500 index remained relatively unchanged during the same period.

From recent global large-cap software stock fund flows, some institutional investors have begun bottom-fishing, “buying the dip” in these recently battered and nearly halved software stocks. They also agree with Huang Renxun’s optimistic view on software stocks—that the market has overreacted and mispriced the strong fundamentals of major software giants focused on “AI + core operational processes.” However, some investors remain cautious but tend to favor fundamentally strong software companies that actively embrace AI, expecting a technical rebound.

Senior executives in the software and chip industries generally believe that the “Software-mageddon” theory triggered by the agent-based AI wave is an exaggerated panic. Some large Wall Street institutional investors are now contemplating whether, after this brutal “collective sell-off and reshuffle,” the long-term, fundamentally sound, AI-enthusiastic platform giants are approaching a technical bottom and whether certain high-quality software companies can stand out and benefit long-term from the “AI-empowered profit expansion” narrative.

Rick Sherlund, one of Wall Street’s most renowned tech analysts and founder of the AI software investment bank Sherlund Partners, who experienced the 2000 dot-com bubble burst, issued a strong statement on Thursday supporting those fundamentally strong software stocks. Sherlund emphasized that the software industry undergoes major upheavals every 10 to 15 years. He warned investors not to overreact to AI’s threat to mature, solidly grounded software companies—especially those with complex enterprise workflows. He pointed out that while “vibe coding” might make simple applications easier to replace, companies like German software giant SAP, with their “extensive integrated platforms and supply chains,” have a larger moat to protect their business, and AI could be seen as a “profit machine” for them.

Is the panic over AI causing a “Software-mageddon”? Is this purely an illogical panic-driven crash, or something more?

This week, after Anthropic released a series of innovative new agent-based AI tools, the stock market’s software sector faced renewed concerns, leading to an unprecedented large-scale sell-off of SaaS providers and the broader software industry.

Anthropic’s new AI tools are primarily based on its “Claude Cowork” agent-based AI, designed to handle many complex and specialized workflows that are core to software and data providers. These tools target functions such as legal and technical research, customer relationship management, financial market analysis, and financial analysis. This has intensified fears that AI could significantly weaken the traditional SaaS business model.

Earlier in January, Anthropic, dubbed a “formidable rival to OpenAI,” launched the “Claude Cowork” agent-based AI programming tool, which aimed to extend AI agent functions from programming terminals to general office scenarios like file management and software interaction. This significantly heightened market fears that AI agents could completely disrupt the SaaS software industry.

Since Tuesday, the two main culprits behind the global software stock collapse are Anthropic’s new AI tools: one capable of handling multiple document tasks, including compliance tracking and legal review, and the latest Thursday release, Claude Opus 4.6, which surpasses GPT-5.2 in AI programming, financial analysis, legal document deep analysis, and Office collaboration. Notably, legal review, financial analysis, and proprietary data services are long-standing competitive moats for many SaaS companies. Following Thursday’s news, FactSet plunged 10% intraday, while Thomson Reuters, S&P Global, Moody’s, and Nasdaq continued to fall, dragging the US stock indices down across the board.

Concerns about the impact of Anthropic’s series of heavyweight agent-based AI tools have caused a new wave of volatility, compounded by disappointing earnings guidance from major companies like Microsoft (MSFT.US) and expectations of larger-scale AI infrastructure investments.

The S&P 500 Software & Services Index, which includes 140 stocks, continued its decline on Thursday, dropping over 5% and extending its losing streak to eight trading days. Year-to-date, the index has fallen about 20%.

Long-standing SaaS giants like Thomson Reuters, Salesforce, and LegalZoom have seen some of the largest declines among S&P 500 components this week. The sell-off has also spread to major Asian IT firms—Tata Consultancy Services and Infosys—whose software services are generally outsourced programming-related fields. Wall Street analysts widely believe this sector will soon be fully replaced by AI.

Despite ongoing market tension, there are significant disagreements among Wall Street analysts and senior tech executives regarding the long-term impact of these AI tools on the software industry.

Among tech leaders, Nvidia CEO Huang Renxun downplayed the idea that AI will completely replace enterprise software products, calling it “the most illogical thing in the world” and stating, “The market has overreacted.” He advocates that many agent-based AI systems, including Claude Cowork, will use and enhance existing software infrastructure rather than completely reshape it. He emphasized that both humans and AI agents tend to prefer existing tools over reinventing the wheel, which explains why the core breakthrough of current AI is its “tool use” capability.

He stated, “There is a view that software tools are declining and will be replaced by AI… but that’s the most illogical thing in the world, and time will prove everything.”

“Whether you are human, robot, AI, or general robot, will you use existing tools or reinvent tools? The answer is clearly to use existing tools… That’s why the latest breakthroughs in AI are all about tool use, because these tools are designed to perform specific tasks.”

Rene Haas, CEO of Arm Holdings, a leading UK chip designer, echoed this view this week. During a earnings call, he said enterprise AI deployment is still in its early stages and has not yet caused large-scale disruptive impacts. He emphasized that both ARM-based and x86-based software ecosystems will benefit from AI-driven growth in the future. In an interview on Thursday, Haas described recent market panic as “micro-hysteria.”

However, concerns about the software sector predate the recent wave of software stock sell-offs triggered by Anthropic. By Wednesday, global hedge funds had shorted about $24 billion worth of software stocks this year. These short positions typically involve borrowing stocks and selling them in large quantities, hoping to buy back at lower prices later for profit.

Major software industry shifts occur roughly every 10 to 15 years! The long-term growth narrative of “AI reshaping profit trajectories” around the software sector is quietly spreading.

Although some tech analysts warn that AI could “completely engulf” software in the long run, most Wall Street analysts believe this view is too aggressive. After this sell-off, they are increasingly convinced that “AI will reshape software profit trajectories” as a long-term growth story.

From the perspective of software engineering and SaaS industry structure, “AI replacing entire enterprise software stacks” is a narrative that can be linearly extrapolated by the market. The sell-off does not mean “software is no longer needed,” but rather that value chains are being redistributed by AI. The “value density” of enterprise software depends not only on interfaces and features but also on proprietary data, permissions/audit chains, compliance and accountability boundaries, system integration, SLAs and availability, change management, and organizational processes. These factors determine that, even with powerful LLMs, high-quality proprietary corpora, structured knowledge bases, controllable tool calls, and traceable outputs are necessary for production environments.

A report by Thomson Reuters Breakingviews suggests that the market’s valuation decline of data companies like RELX/Reuters may be overdone: most of RELX’s revenue is expected to face low risk of LLM substitution, and only a limited portion of their business is truly “at risk.” These companies are also launching AI tools trained/enhanced on their own databases. Similarly, Breakingviews emphasizes that equating an AI plugin with replacing all critical enterprise software layers is an illogical leap.

Huang Renxun states that “software will be replaced by AI” is “the most illogical thing,” essentially emphasizing that AI is more likely to augment existing large software platforms rather than replace them entirely. The popularity of ChatGPT worldwide signals the arrival of the AI era, which also means that the “human-driven SaaS workbench” is gradually shifting toward an “AI-native task execution layer.” During this transition, the most easily replaced are lightweight applications and simple operational workflows (“vibe coding” style rapid assembly), which explains why some analysts believe that deeply integrated, process- and supply chain-coupled large software systems like SAP and Microsoft are more likely to become the “foundations and strongest pillars” of the AI agent era.

This wave of software stock sell-offs is more like the market’s extreme response to a new question: to what extent will profit pools of SaaS vendors be redistributed to “model factories + agents”? In the short term, this can only be validated by two “hard indicators”: (1) the actual deployment and paid adoption speed on the enterprise side; (2) the elasticity of SaaS vendors’ AI-related product revenues, renewals, and net retention—similar to some buy-side representatives in the Breakingviews report, who are waiting for “actual revenue growth data from AI-related products” or more enterprise deployment announcements as catalysts for increased positions.

Prior to this, the volatility in software stocks is likely to continue: on one hand, technical factors may cause “oversold rebounds”; on the other, capital will continue to shift structurally—favoring vertical software/data asset companies with strong AI training/inference ties and high data and workflow stickiness, as well as platforms that can keep AI “controllable, auditable, and integrable.” Conversely, application-layer names with weaker moats, higher homogeneity, and more expensive valuations will require higher risk premiums. The next phase for the software sector is likely to be “bottoming out and then diverging,” with giants like Microsoft, MongoDB, Snowflake, Palantir, and SAP—who possess data assets and strong fundamentals—more likely to rebound strongly after panic.

Goldman Sachs, in its latest research report, states that selling pressure has largely been exhausted, and software stocks are bottoming out. Goldman emphasizes that the IGV ETF, a benchmark for the software sector, experienced a significant “washout” of holdings and trading volume after several days of sharp declines, approaching a five-year low, indicating that selling pressure may have eased. Meanwhile, Goldman notes signs of clients gradually unwinding index hedges and realizing gains through put sales, suggesting the sell-off may be nearing its end. Most importantly, since Wednesday and Thursday, institutional funds have been returning to IGV, driving its trading volume to the largest single-day increase since 2023, hinting at early “testing the bottom” and potential short covering.

Wedbush Securities also echoed Huang Renxun’s view in a Wednesday report, stating that although AI poses short-term headwinds for software providers, the recent sell-off reflects an “Armageddon scenario” that is far from realistic pricing. “Enterprises will not completely overturn hundreds of billions of dollars in previous software infrastructure investments to migrate to Anthropic, OpenAI, or other startups, whose infrastructure is far from capable of handling such loads,” the report said.

Constellation Research notes that the current sell-off reflects concerns that AI could compress profits and limit the pricing power of software companies, rather than a “death sentence” for the industry.

“AI-driven workflows are likely to gradually encroach on the SaaS space, which will undoubtedly impact valuation multiples,” said Rolf Bulk, a tech stock analyst at Futurum Group. However, he believes some software providers—especially platform companies running critical enterprise workloads like Microsoft, Oracle, and ServiceNow—still have a “right to earn.” He added that their deep data assets and entrenched roles in customer workflows make them more likely to coexist with AI long-term and benefit from it, rather than be completely replaced.

Rick Sherlund, a veteran tech analyst who experienced the 2000 internet bubble burst, issued an optimistic bullish call on Thursday, stating that despite recent tech stock corrections, the market remains on the verge of a significant rally. Sherlund, recognized as one of Wall Street’s most influential sell-side tech analysts and a 17-time top-ranked analyst by Institutional Investor, emphasized that understanding current market dynamics hinges on AI applications shifting from consumer-facing to enterprise applications. As companies deploy AI agents and reasoning-intensive applications, demand for reasoning computation will explode. He noted that major tech upheavals every 10 to 15 years often precede new tech bull markets, citing examples like PeopleSoft being replaced by Workday and Siebel Systems overtaken by Salesforce.

Sherlund warned investors that while vibe coding might make simple applications easier to replace, companies like German software giant SAP, with their “extensive integrated platforms and supply chains,” have a larger moat to protect their business, and AI could become a “profit machine” for them.