‘No reasons to own’: Software stocks sink on fear of new AI tool

THE new year was supposed to bring opportunities for beaten-down software stocks. Instead, the group is off to its worst start in years. 

The release of a new artificial intelligence (AI) tool from startup Anthropic on Jan 12 rekindled fears about disruption that weighed on software makers in 2025. TurboTax owner Intuit tumbled 16 per cent last week, its worst since 2022, while Adobe and Salesforce, which makes customer relationship management software, both sank more than 11 per cent. 

All told, a group of software-as-a-service stocks tracked by Morgan Stanley is down 15 per cent so far this year, following a drop of 11 per cent in 2025. It is the worst start to a year since 2022, indicated data compiled by Bloomberg. 

“The Anthropic news we got underlines how difficult it is to assess what growth can look like,” said Bryan Wong, portfolio manager at Osterweis Capital Management, which has US$7.9 billion in assets. “The pace of change is about as fast as I can remember, and that makes things about as uncertain as I can remember.”

Anthropic’s Claude Cowork service, released as a “research preview”, can create a spreadsheet from screen shots or produce a draft report from an assortment of notes, according to the company. It was developed quickly, largely with AI. 

While unproven, the tool represents just the type of capabilities that investors have been fearing, and reinforces bearish positions that are looking increasingly entrenched, said Jordan Klein, a tech-sector specialist at Mizuho Securities. 

“Many buysiders see no reasons to own software no matter how cheap or beaten down the stocks get,” Klein wrote in a Jan 14 note to clients. “They assume zero catalysts for a rerate exist right now,” he said, referring to the potential for higher valuation multiples.

The latest sell-off has exacerbated an already yawning gap between the performance of software companies and other areas of the tech sector. Anxieties about competition from upstart AI services are overshadowing characteristics such as hefty profit margins and recurring revenue that for years made the group attractive in the eyes of market pros. 

While the Nasdaq 100 Index is flirting with record highs, companies such as ServiceNow are trading at the lowest levels in years. One problem is that most software makers have not shown much traction with their own AI offerings.

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Salesforce has touted adoption of its Agentforce product, though it has not moved the needle significantly for revenue. Adobe has incorporated generative AI features into its photo and video-editing software but did not update some AI-related measures in its last quarterly earnings report in December. 

Incumbents have advantages in areas such as distribution and data, but they need to show an acceleration in growth for the stocks to rebound, Wong said. And that does not appear likely any time soon. 

Earnings expansion for software and services companies in the S&P 500 is projected to slow to 14 per cent in 2026, down from estimated growth of about 19 per cent in 2025, indicated data compiled by Bloomberg Intelligence. The fundamental picture continues to look rosier in other areas of technology.

Take chipmakers. Companies such Nvidia have greater visibility into revenue growth, thanks to commitments from tech giants Microsoft, Amazon.com, Alphabet and Meta Platforms to spend aggressively on AI infrastructure this year. Semiconductor-related stocks are expected to post profit growth of nearly 45 per cent in 2025 and then accelerate to 59 per cent in 2026, noted Bloomberg Intelligence.

“The reason chipmakers are outperforming is that their fundamentals are getting a lot better and there’s more certainty about their growth given their customers,” said Jonathan Cofsky, portfolio manager at Janus Henderson Investors. “At the same time, there’s a lot less certainty about how AI will change the software ecosystem.”

Meanwhile, valuations for software companies keep getting cheaper. The Morgan Stanley basket is priced at 18 times earnings projected over the next 12 months, its cheapest on record, and well below an average of more than 55 times over the past decade. 

“The reason software companies had lofty multiples is because they were subscription based, with recurring revenue that you could extrapolate into the future almost forever,” said Osterweis Capital’s Wong.

“It is hard to know what multiple they should be trading at if they’re going up against AI agents that are running 24/7 and have the ability to complete tasks, with big projects getting done in a day.”

Those depressed valuations, however, are among several factors prompting some on Wall Street to voice optimism about a rebound in the sector.

Barclays expects software stocks will “finally catch a break” in 2026 as customer spending remains stable and valuations are attractive. Goldman Sachs anticipates that rising AI adoption will serve as more of a tailwind for software companies by expanding the total addressable market.

DA Davidson argues that because narratives have overwhelmed fundamentals for many software companies, 2026 represents a good time to selectively return to the group.

“We’re not in a position where we can say the turn is here, since existential fears about AI will be here for a while, but the sector does look more interesting,” said Chris Maxey, managing director and chief market strategist at Wealthspire, which has US$580 billion in assets. “The group isn’t a screaming buy, but we’re getting closer to that.” BLOOMBERG