NEW YORK, Feb 5 - A sharp and swift deterioration in software stocks has unsettled markets and set off a debate among investors over whether the downturn represents a buying opportunity or the start of a more prolonged reassessment.
The selloff - popularly described in market commentary as "Software-mageddon" - has accelerated in recent sessions as worries about artificial intelligence-led disruption grow and as investors awaited corporate earnings that could alter outlooks for the sector. These moves have also coincided with a broader shift of capital away from technology and toward other sectors that have underperformed during the long bull market.
The S&P 500 software and services index plunged 13% in the past week alone, erasing more than $800 billion of market value in that span. Large-cap names such as Intuit, ServiceNow and Oracle were among those that suffered sharp losses during the drop.
Measured against the broader S&P 500, the software group posted its worst three-month relative performance since May 2002, a period associated with the bursting of the dot-com bubble, according to Evercore ISI equity strategists. That comparison underscores how dramatically investor sentiment has shifted for a sector that has been a central driver of recent market gains.
Investor reactions and selective buying
Some portfolio managers say the pace and magnitude of the decline have produced technical signals that could mark at least a short-term bottom for certain software stocks, prompting modest, tactical purchases.
"The selloff, which arguably started last quarter, is a manifestation of an awakening to the disruptive power of AI...," said James St. Aubin, chief investment officer at Ocean Park Asset Management in Santa Monica, California. "Perhaps this is an overreaction, but the threat is real and valuations must account for that."
Investors such as Jake Seltz, a portfolio manager at Allspring Global Investments in Minneapolis, said he has been adding incrementally to positions including ServiceNow and Monday.com in recent months as prices have fallen. He described these purchases as "at the margin" and said he is waiting for clearer catalysts before becoming more assertive. Those catalysts would include software companies reporting meaningful AI-related revenue or enterprise customers publicly confirming deployments of AI-enabled solutions.
Still, options market activity showed limited appetite for aggressive accumulation of the most battered names, reflecting a broader hesitancy to commit to the sector while uncertainty remains elevated.
Drivers of the latest leg down
The most recent wave of volatility was sparked by concerns tied to a new tool from Anthropic's Claude large language model and compounded by disappointing quarterly results published by major players including Microsoft. Since its recent high at the end of October, the S&P 500 software index has fallen roughly 25%, while the S&P 500 overall has been little changed in that period.
Market commentators characterized the dislocation as dramatic. "This has been Software-mageddon," said Art Hogan, chief market strategist at B Riley Wealth, summing up the intensity of the sector's losses.
Other companies that recorded notable drops include Salesforce and Thomson Reuters, the latter of which owns the Westlaw legal database and the Reuters news agency. Within the broader set of megacap technology stocks, Microsoft stood out as the worst performer so far this year among the group often referred to as the "Magnificent Seven."
Rotation into other sectors
The swift pullback in software names has coincided with a rotation by investors into value-tilted and quality-oriented sectors that had generally lagged behind technology during the multi-year bull market that began in October 2022. Sectors drawing more investor interest include consumer staples, energy and industrials, as market participants seek opportunities perceived to offer more attractive valuations and greater potential for near-term outperformance.
Some investors framed the move away from expensive tech stocks as a rational reallocation toward areas with "more room to run," rather than a panicked response to the collapse of software and tech industries across the board. Jim Masturzo, chief investment officer at Research Affiliates, emphasized that reallocations should be driven by relative value prospects across sectors.
Where value might exist and why caution remains
Whether software now represents genuine value is the central question confronting investors. Several of the sector's largest declines this year have been concentrated in names such as Intuit, ServiceNow and Salesforce. Given recent price actions, some managers have initiated small-scale purchases in select firms but stopped short of full conviction.
Walter Todd, chief investment officer at Greenwood Capital in South Carolina, said the group was technically oversold and therefore perhaps near "at least a near-term bottom." Greenwood has made modest buys of ServiceNow and Microsoft in recent days, though Todd stressed he would not "bet the farm" on software stocks. He suggested that a wholesale and immediate replacement of current software infrastructure by AI solutions does not appear realistic in many settings.
Brad Conger, chief investment officer at Hirtle, Callaghan & Co., said he was weighing purchases of companies such as SAP, Adobe and Intuit that have been hit hard by the selloff, noting that aspects of their declines could argue for a rebound. Yet he added he was not comfortable committing at current levels because he did not feel "the worst threat is priced in."
Unclear endpoint and risk of continued repricing
Some market participants drew parallels between the current episode and declines seen last year after the emergence of the low-cost Deepseek AI model, which prompted fresh questions about the AI financial ecosystem. Investors are now attempting to gauge the true capabilities of AI and how those capabilities will affect future software sales growth.
"We are starting to get a better sense of what AI's capabilities are, the market is doing some repricing, signaling less confidence in future software sales growth in an AI-driven world," said Rene Reyna, head of thematic and specialty product strategy at Invesco. "Is it overdone? We can't tell yet. But selling can beget more selling."
For now, the sector faces a mix of tactical interest from buyers seeking bargains and a larger contingent of investors holding back until clearer earnings evidence or corporate adoption stories emerge. The coming weeks of quarterly reports and any additional developments around AI tools and enterprise deployments are likely to influence whether the recent rout stabilizes or deepens.