Software sector enters bear market territory
Software stocks extended their sharp decline on Thursday as investors deepened their retreat from the sector, driven by growing concerns that rapid advances in artificial intelligence could disrupt long-standing business models. The iShares Expanded Tech-Software Sector ETF fell about 5% in morning trading, marking its steepest one-day drop since last April.
The ETF is now down roughly 21% from its recent high, officially pushing the software industry into bear market territory. Month to date, the fund has lost nearly 14%, putting it on track for its worst monthly performance since October 2008, when it plunged 23% during the financial crisis.
Earnings fail to calm investor nerves
The sell-off persisted despite solid earnings from several high-profile companies. ServiceNow reported fourth-quarter results that exceeded Wall Street expectations and issued stronger-than-expected guidance. Still, its shares fell more than 12% as investors focused less on near-term performance and more on long-term risks.
Analysts said stable growth was no longer enough to reassure markets. Morgan Stanley described the results as “good, but not good enough,” noting that investor skepticism toward incumbent application vendors has intensified amid fears that AI could erode traditional demand.
Broad-based declines hit major names
Losses spread across the sector, with HubSpot, Klaviyo, Atlassian, Pegasystems, and Strategy all falling by double digits. Microsoft added to the pressure, sliding about 10% after reporting a slowdown in cloud growth and issuing weaker-than-expected operating margin guidance. The drop put Microsoft on track for its worst single-day decline since March 2020.
In Europe, SAP shares tumbled as much as 14% after the company reported cloud backlog growth that fell well short of expectations, further reinforcing fears that enterprise software demand may be entering a more challenging phase.
AI disruption reshapes investor expectations
Investor unease has been amplified by the speed of AI innovation itself. Recent releases from AI developers have highlighted how quickly new tools can be built and deployed, raising questions about whether traditional software licensing and subscription models can maintain their dominance.
Market commentators have warned that patience on Wall Street may be wearing thin, especially as investors compare the pace of innovation among AI-native firms with that of established technology giants.
Executives push back against AI pessimism
Company leaders have sought to counter the narrative that AI will replace software vendors. ServiceNow CEO Bill McDermott argued that AI systems still rely on structured workflows to deliver consistent business outcomes. He said the real value of AI would emerge as it becomes embedded directly into enterprise processes rather than replacing them outright.
For now, however, markets remain unconvinced. As investors reassess valuations and long-term growth assumptions, software stocks continue to face intense pressure in an environment increasingly shaped by AI-driven uncertainty.
