As software stocks slump, investors debate AI’s existential threat 

Investors were assessing on Wednesday whether a selloff in global software stocks this week had gone too far, as they weighed if businesses could survive an existential threat posed by artificial intelligence. 

The answer: It's unclear and will lead to volatility.

After a broad selloff on Tuesday that saw the S&P 500 software and services index fall nearly 4%, the sector slipped another 1% on Wednesday. 

While software stocks have been under pressure in recent months as AI has gone from being a tailwind for many of these companies to investors worrying about the disruption it will cause to some sectors, the latest selloff was triggered by a new legal tool from Anthropic's Claude large language model (LLM).

The tool - a plug-in for Claude’s agent for tasks across legal, sales, marketing and data analysis - underscored the push by LLMs into the so-called “application layer,” where these firms are increasingly muscling into lucrative enterprise businesses for revenue they need to fund massive investments. If successful, investors worry, it could wreak havoc across a range of industries, from finance to law and coding. 

The LLMs strategy – and its potential to hurt established businesses – is reminiscent of how Amazon.com disrupted several industries by using its foothold in a niche online book market to build a business that now spans retail, cloud and logistics.

Some analysts said the success of these AI LLMs was, however, far from guaranteed, given that they lack the specialized data that is crucial to businesses in the industries. The selloff reflected a scramble to shield portfolios as the rapid advances in the technology muddy valuations and business prospects beyond the standard three-to-five-year forecasts of companies, they said. 

"We are not yet at the point where AI agents will destroy software companies, especially given concerns around security, data ownership and use," said Ben Barringer, head of technology research at Quilter Cheviot. 

Barringer said more volatility is likely to come. "During times of volatility, people often shoot first and ask questions later," he said. 

That was on full display in recent days. The S&P 500 software and services index has fallen nearly 13% over five straight sessions and is down 26% from its October peak, whereas the S&P 500 scaled an all-time high just this week. 

The MSCI world software and services index has dropped 13% over five days.

Taking cues from Wall Street, Asia suffered sharp declines on Wednesday. India's IT exporters shed nearly 6% and Japanese software and systems developers NEC, Nomura Research and Fujitsu sank between 8% and 11%. 

Selling pressure, however, started to ease in Europe, with the region's largest software firm SAP down only 0.1%.

'TIME WILL PROVE ITSELF'

Some analysts and experts said it is too early to call an end to global software and data companies. Nvidia CEO Jensen Huang said on Tuesday that fears AI would replace software and related tools was "illogical" and "time will prove itself." 

Mark Murphy, Head of U.S. Enterprise Software Research at JPMorgan, said it “feels like an illogical leap” to say a new plug-in from an LLM would “replace every layer of mission-critical enterprise software." 

Software is seen as especially vulnerable to disruption as tools such as Claude increasingly automate the routine tasks that have long underpinned the industry's pricing power.

"We are now in an environment where the sector isn't just guilty until proven innocent but is now being sentenced before trial," said Toby Ogg, an analyst at JPMorgan.

"Our sense from investor discussions is that general appetite to step in remains generally low," he added, citing risks including competition from AI-native firms and clients building their own solutions in-house. 

(Reporting by Danilo Masoni. Additional reporting by Medha Singh and Siddarth S. Editing by Amanda Cooper, Dhara Ranasinghe, Mark Potter, Anil D'Silva and Nick Zieminski)