(Bloomberg) — In recent months, investors have been moving away from software stocks, largely driven by fears of disruption from artificial intelligence. Worries about the future earning potential of these companies aren’t helping either.
This week, a number of software giants—like Workday, Salesforce, Intuit, Autodesk, and Snowflake—are set to announce their earnings. Yet, the pressure surrounding AI’s potential to hinder growth is so pervasive that it’s unclear if executives can do much to change the narrative right now.
“It’s as though everyone is looking to sell quickly,” remarked Jack Janasiewicz, a leading portfolio strategist at Natixis Investment Managers Solutions, which oversees $1.4 trillion in assets. “These companies are viewed as guilty until proven innocent.”
The pessimism escalated on Monday when investors again sold off software stocks following a report from Citorini Research detailing possible risks linked to AI. Consequently, the software and services sector found itself one of the weakest performers on the S&P 500 index. The iShares Expanded High-Tech Software Sector ETF, also known as IGV, dropped 4.8% that day, heading for its worst quarter since 2008. Market options suggest further declines might be on the horizon.
Janasiewicz noted that declining sentiment in the software sector indicates a significant potential for further losses. Notably, as companies report their earnings this week, Salesforce is down 30%, Intuit by 45%, Autodesk 25%, Snowflake 26%, and Workday 39%. In contrast, the S&P 500 is slightly up this year.
A lot of anxiety revolves around new AI tools from firms like Anthropic, OpenAI, and Alphabet Inc. These tools enable users to write software code using AI, raising concerns that if everyone can create apps, the demand for major software products could dwindle.
On Tuesday, Anthropic unveiled new AI tools aimed at automating functions in sectors like human resources and design. They announced collaborations with software companies, like Intuit and DocuSign, to help revitalize the industry. Following this news, the Software ETF gained 2.2% on Tuesday.
While the threats posed by AI are genuine, they aren’t fully reflected in the current financials. Some Wall Street analysts argue that fears of recession may be overstated. Data shows that among the 15 S&P 500 software firms that reported earnings this financial year, 87% surpassed profit forecasts and 67% exceeded revenue expectations. In comparison, about 75% of S&P 500 companies beat earnings estimates.
Bank of America strategists led by Savita Subramanian highlighted a disconnect between actual business performance and stock market behavior. They suggest that software may represent a “new value area.” This perspective might hold merit, especially considering that the S&P 500 Software and Services Index is trading at under 21 times its trailing P/E, the lowest in three years, and well below a five-year average of 29.
Salesforce, expected to report on Wednesday, is projected to see an approximate 12% rise in sales and about a 10% increase in adjusted profits from the previous year, though net income is anticipated to decline by 15%. Despite this, forecasts for revenue and net income for 2026 and 2027 remain largely unchanged, leading Salesforce shares to hit an all-time low of about 13 times expected earnings.
Workday announced expectations for a double-digit sales increase and for net income to more than double. Although analysts have begun to lower profit forecasts, the company’s stock is still trading at an all-time low multiple.
We can’t predict exactly how AI will affect the software landscape. Disruption might be confined to finance, or it could reach much further across the business spectrum. This unpredictability complicates long-term projections. Surprisingly, while revenue expectations for 2026 have seen improvements, those for 2027 have diminished since December, according to Bloomberg Intelligence.
“The uncertainty level is so significant that making predictions beyond 2026 feels risky,” stated Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.
Regardless of recent earnings, Wall Street is likely to remain wary of the sector, particularly for firms like Salesforce, which have consistently lagged behind the market—down 24% over the past five years, while the S&P 500 surged 76%.
“This company hasn’t embraced AI fully, and disruption is only going to accelerate,” Samana added. “It’ll take more than just one strong announcement to shift perception; they’ll need to demonstrate growth consistently in the coming months.”
For many investors, favorable results and optimistic forecasts seem to merely delay the necessary adjustments needed for AI considerations.
“Should we receive a positive report, it might be a temporary relief, indicating that AI isn’t a concern for 2027, but more of a 2030 issue,” observed Samana. “With the current trajectory likely leading to major disruptions, not every player will endure.”
On another note, International Business Machines experienced its worst trading day in over 25 years on Monday. This came after Anthropic revealed its Claude Code tool will aid in modernizing COBOL, an aging programming language prevalent on IBM systems. IBM’s stock plummeted 13%, marking its most significant single-day drop since October 2000. The decline brought IBM shares down by 27% in February, which is the steepest monthly drop since at least 1968.
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Arup Shah, a key figure in the report from Citrini Research that initiated this wave of concern, is advocating for an AI tax to mitigate job losses. He believes AI could potentially replace many workers, radically reshaping economies like that of the United States.
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Anthropic is providing some employees the chance to sell shares pegged at an approximate $350 billion valuation, which might be realized based on the company’s recent $30 billion investment round.
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Anthropic also expressed concerns that three major AI developers in China were trying to illegally obtain insights from their models to enhance rival products. This raises worries in the U.S. about an uneven playing field.
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Apprehensions over possible AI disruptions could escalate borrowing costs for software firms, creating issues for a sector already struggling with high debt, said Hamza Remsguer, founder of Alini Capital Management.
