Software company stocks experienced a significant downturn on Thursday, extending a period of intense selling this year. Investors are increasingly concerned that rapid advancements in artificial intelligence could fundamentally disrupt established business models, leading to a broad retreat from the once-favored sector.
The sell-off has pushed the software industry into bear-market territory, with major stock indexes for the sector showing steep declines. This shift in sentiment occurred despite some companies reporting solid financial results, indicating that future uncertainty is currently outweighing present performance in the eyes of investors.
Key Takeaways
- The iShares Expanded Tech-Software Sector ETF (IGV) fell approximately 5%, marking one of its worst single-day drops since last April.
- The software sector has entered a bear market, with the IGV fund down about 21% from its recent high.
- Investor anxiety is centered on the potential for AI to render traditional software licenses and workflows obsolete.
- Strong earnings reports from companies like ServiceNow were not enough to prevent significant stock declines, highlighting a deep-seated market skepticism.
- Industry leaders argue that AI will integrate with, rather than replace, existing enterprise software systems.
A Sector Enters Bear Market Territory
The financial markets sent a clear signal of distress for the software industry this week. The iShares Expanded Tech-Software Sector ETF (IGV), a key barometer for the sector's health, dropped by about 5% in morning trading. This decline puts the fund on track for its most significant one-day fall since April of last year.
This recent drop is part of a larger trend. The fund is now down approximately 21% from its recent peak, a figure that officially places the software industry in a bear market. The downward momentum has been swift and severe, reflecting a rapid change in how Wall Street views one of its previously most reliable industries.
Historic Monthly Decline
Month-to-date, the IGV fund is down nearly 14%. If this trend holds, it would mark the fund's worst monthly performance since October 2008, when it plummeted 23% during the global financial crisis.
This widespread sell-off suggests that investors are re-evaluating the long-term viability of companies that rely on traditional software models. Valuations that were once justified by consistent subscription growth are now being questioned in the face of a potentially transformative new technology.
Strong Earnings Fail to Reassure Investors
In a telling sign of the market's current mood, positive financial news has been insufficient to stop the bleeding. Enterprise software giant ServiceNow saw its shares plunge by more than 12% on Thursday, even after delivering a strong earnings report.
The company surpassed Wall Street's expectations for its fourth-quarter earnings and provided guidance that was better than anticipated. However, this was not enough to win over anxious investors. In a note to clients, analysts at Morgan Stanley described the report as “Good, but not good enough.”
“In an environment of heightened investor skepticism on incumbent application vendors, stable growth, in line with expectations, likely falls short of shifting the narrative,” the Morgan Stanley analysts wrote.
The reaction to ServiceNow's report encapsulates the core fear: that even healthy, well-run software companies may be vulnerable. The concern is that emerging AI competitors and advanced automation tools could steadily erode the demand for conventional software licenses and workflows over time.
Other major players also felt the pressure. German software firm SAP saw its stock slide as much as 14% after it reported weaker-than-expected growth in its cloud contract backlog. Similarly, Microsoft shares fell about 10% after it reported a slowdown in cloud growth, putting the stock on a path for its steepest one-day drop since March 2020.
The Accelerating Pace of AI Innovation
Investor unease is being amplified by the sheer speed at which AI technology is developing. The rapid release of powerful new models creates a sense of unpredictability and fuels speculation about which companies will be left behind.
Anthropic's Rapid Releases
AI company Anthropic recently released Claude Opus 4.5, its third major model launch in just two months. The company stated the new model excels at complex tasks like coding and computer operation, targeting professional software developers and knowledge workers—the core customer base for many established software firms.
This pace of innovation is putting immense pressure on legacy tech giants to demonstrate their own AI capabilities. Ben Reitzes, head of technology research at Melius Research, commented on the challenge facing companies like Microsoft.
“It is a little embarrassing that in 10 days, Anthropic was able to invent, co-work, put it out and everybody ... could look at it and go, ‘Wow, why isn’t Microsoft doing that?’” Reitzes said. “And that is a narrative they need to fix... I think patience is going to run thin on the Street.”
Industry Leaders Defend Software's Role
Amid the market turmoil, some industry executives are pushing back against the narrative that AI will simply replace existing software. They argue for a future where AI and traditional software are deeply integrated.
On ServiceNow’s earnings call, CEO Bill McDermott addressed investor fears directly, stating that concerns about AI displacing software vendors are misplaced. He positioned his company as a crucial component for making AI useful within a large organization.
“The real payoff comes when trillions of tokens move beyond pilots to be embedded directly into the workflows where business decisions are made,” McDermott explained. “ServiceNow is the gateway to this shift, serving as the semantic layer that makes AI ubiquitous in the enterprise.”
McDermott added that because AI systems are probabilistic—meaning they operate on likelihoods rather than certainties—companies will still need structured workflow software to guarantee consistent and reliable business outcomes. According to this view, AI is a powerful tool, but it requires the foundational logic and processes that enterprise software provides to be truly effective and safe for business operations.