Jan 29 - U.S. software stocks retreated on Thursday as investor anxieties about intensifying competition from artificial intelligence-related firms were reinforced by earnings and guidance from two large enterprise software vendors.
ServiceNow shares dropped 9.6% after the company fell in the session following its earnings. The decline came despite the firm forecasting annual subscription revenue above Wall Street estimates. In Europe, Germany's SAP plunged almost 15% after analysts highlighted that its cloud backlog and its revenue forecast for 2026 were below projections, prompting a steep market reaction.
Analysts at J.P. Morgan summed up the mood in the sector, saying: "The malaise in software sentiment persists, coupled with a seemingly paradoxical and vicious cycle of depressed valuations, with maintained, if not rising, investor expectations." That combination of pressure on valuations and elevated expectations contributed to a wider pullback across the group.
The combined impact of the ServiceNow and SAP moves weighed on peers. Salesforce shares declined 5.6%, while Adobe and cloud security vendor Datadog each fell 3.1%. Collectively, these names were among the largest decliners on the Nasdaq on the day.
Market technicians and strategists pointed to fears that AI could reallocate industry value toward infrastructure players. Adam Turnquist, chief technical strategist for LPL Financial, said: "All these software names are performing terribly because the market's kind of in our view pricing a worst case scenario that software is dead because AI is disrupting the space."
Investors have pulled back on software stocks in recent weeks as they reassess how much of the AI boom will translate into near-term revenue and pricing power for incumbent enterprise software companies versus infrastructure segments, such as data centers and chip companies.
The S&P 500 Software and Services Index declined 6.5% and was on track for a third consecutive month of losses, underperforming the broader S&P 500, which rose 0.1% on the day.
Attention also centered on Microsoft. The company said it had spent a record amount on AI in the last quarter and reported slower cloud-computing growth. Shares of the tech giant slid 9.8% in the session.
The day's trading highlighted the market's ongoing debate over winners and losers in the early phase of AI adoption. While certain infrastructure players may capture a larger share of near-term spending, the implications for traditional software vendors' revenue trajectories and multiples remain a central source of investor uncertainty.