The software industry, long a reliable performer in equity markets, is experiencing a period of significant upheaval. A confluence of factors, including the shift to subscription-based models, the rise of cloud services, and, most recently, the rapid advancement of artificial intelligence (AI), is creating a challenging environment for established software companies. Concerns are mounting that AI could disrupt traditional software development and deployment, leading to a reassessment of valuations across the sector.
The anxieties aren’t merely theoretical. Investors are reacting to the perceived threat, with the largest U.S. Software ETF having lost approximately 27 percent of its value since the beginning of the year, according to reports from February 25, 2026. Individual companies are also feeling the pressure. Adobe, Salesforce, and Workday are all trading significantly below their previous highs, down 45, 45, and 30 percent respectively, as of the same date. This downturn reflects a growing skepticism about the long-term sustainability of traditional software business models in the age of AI.
AI’s Impact on Software Development
The core of the issue lies in the potential for AI to democratize software development. Companies are increasingly capable of building specialized, in-house solutions using AI-powered development tools, reducing their reliance on expensive, off-the-shelf software packages. IT budgets are being redirected towards AI implementation and infrastructure, often at the expense of traditional software investments. This shift is described by some analysts as a “Frontalangriff” on established software companies, as noted by Jochen Stanzl, Chief Market Analyst at Consorsbank.
The release of Anthropics’ “Claude Cowork” is being cited as a key catalyst for the current market correction. The new AI agent, with its ability to quickly provide legal answers, has raised concerns about the potential for AI to displace professionals in fields like law, and by extension, the software that supports them. Anthropic’s advancements have positioned the company as a potential IPO candidate for 2026, further highlighting the growing investor interest in AI.
Broader Tech Sell-Off
The software sector’s woes are part of a broader trend affecting major technology companies. The “Magnificent Seven” – Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla – are all experiencing double-digit percentage declines. Microsoft, in particular, has seen a roughly 30 percent drop in its stock price, while Amazon and Meta have fallen by approximately 20 percent each. Alphabet, NVIDIA, and Apple have also experienced declines, ranging from 10 to 20 percent. NVIDIA is scheduled to release its latest earnings report this evening, which could further influence market sentiment.
Value Stocks Gain Traction
Amidst the tech sell-off, a shift in investor preferences is becoming apparent. Value stocks, characterized by stable cash flows and reliable dividends, are gaining favor over high-growth tech companies. Sectors like telecommunications, industrials, energy, and pharmaceuticals are attracting investment as investors seek safer havens in a volatile market. This trend suggests a potential long-term realignment of market priorities, with a greater emphasis on profitability and sustainability.
This shift is prompting some analysts to recommend a re-evaluation of portfolio allocations, suggesting that investors consider diversifying into value-oriented stocks to mitigate risk. The current market environment underscores the importance of a balanced investment strategy and the need to adapt to changing market dynamics.
Looking ahead, the software industry will need to demonstrate its ability to adapt to the challenges posed by AI. Companies that can successfully integrate AI into their offerings and develop innovative solutions will likely thrive, while those that fail to do so may face continued headwinds. The coming months will be crucial in determining the long-term trajectory of the software sector and its place in the evolving technological landscape.
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