Wall Street’s main concern this week could be summed up as: Is the software sell-off exaggerated or does it signal the start of a bursting AI bubble? Software stocks continued their rout Thursday, with the iShares Expanded Tech-Software Sector ETF (IGV) down more than 9% since the start of the week. Anthropic’s latest updates on Claude have fueled fears that agentic AI could prove an existential threat to an industry that relies on selling enterprise software packages to as many individual users as possible. Software stocks entered a bear market last week but are now down nearly 30% from their most recent high. Investors have turned against a market considered crowded and expensive after its exorbitant performance in recent years. IGV jumped more than 58% in 2023 and 23% in 2024. It grew just over 5% in 2025. Those who believe the sell-off has gone too far argue that agentic AI is incapable of significantly harming the industry’s incumbents. They expect it to be as much of a flash in the pan as DeepSeek AI was this time last year. The Chinese company shook the industry last year by unveiling an open source AI model developed at very low cost. John Campbell, head of the Systematic Core Equity team at Allspring Global Investments, is in this camp. “The massive sale of software is exaggerated,” he writes. “Many established players will not be easily disrupted by agentic AI. They are actively developing their own agents to improve the functionality and cost-effectiveness of their existing software.” Software on sale On the contrary, many view the withdrawal as a buying opportunity. Some say they are waiting for a bigger drawdown before jumping in and have urged investors to pick their winners carefully. Longtime tech analyst Fred Hickey brushed off the software rout. He said software stocks are on his potential buy list if the sector as a whole is hit by a wave of trader capitulation, as he expects. “I think this argument is essentially… hogwash and as a result, I have considered purchasing certain stocks,” Hickey wrote in a newsletter Tuesday. “However, after reviewing the valuations, I decided that they were still too high,” especially when stock-based compensation is taken into account. According to Jefferies, 73% of software stocks are oversold, an eight-year high. Indeed, Tyler Radke, co-head of U.S. software stock research at Citigroup Research, told CNBC’s “Power Lunch” on Wednesday that investors can start selectively adding companies that will be “relevant as we get to the other side of this AI business.” Its preference is for companies exposed to large-scale volumes of data. Microsoft, MongoDB and Snowflake top the list. “The first victims” Of course, others fear that the slide is not yet over. Greg Swenson, co-portfolio manager of the Leuthold Select Industries Fund, said there could be more “washout” even if there was a near-term rebound. He pointed out that IGV trades at a P/E just below 40 times current earnings, a level that is more attractive than it has been but could hardly be considered cheap. “Things generally don’t tend to bottom out at, say, historic median or average levels,” Swenson told CNBC. “It tends to go pretty far, like this, when there’s this type of emotional selling.” He also worried that the rout might prove more lasting than investors expected. Unlike DeepSeek’s temporary impact, he said, this wave of sales could indicate deeper problems throughout the tech sector, even among hyperscalers that have taken on more debt as they increased their capital spending. “I think it’s probably a more sustainable decision,” Swenson said. This could have ramifications beyond just software stocks. Companies with private stakes in credit, such as Blue Owl and Ares Management, fell. The pair is down 9% and 16%, respectively, since the start of the week. Hardika Singh, an economic strategist at Fundstrat Global Advisors, told CNBC that she expects the sell-off to have “taken a step forward” but will be watching how software companies proceed. If they are able to adapt to changing technology, that’s a positive signal for the AI business, she said. “If they could reorganize here, pivot here, that would be great. The sell-off would end up being like a ‘DeepSeek moment,’ where we forget about it a year later and it’s like a healthy correction,” she said. “But if they can’t reorganize, I think it’s a breakdown in the AI business.” If that happens, software would be “the first victims of the industrialization of AI in this economy,” she added. Ongoing Rotation More than anything, the stock has confirmed a bias toward other segments of the market this year. “Real economy” sectors such as energy, manufacturing and materials, which can benefit from data center construction, have seen demand. Larry McDonald, author of the Bear Traps report, said he favors global value stocks, which could outperform as money continues to flow through the economy. After all, he pointed out, it will only take a small portion of the $30 trillion withdrawn from the Nasdaq Composite to make a major difference in other segments of the market. This seemed to play out this week. Only the Dow Jones Industrial average has been higher since the start of the week on Thursday. The equal-weighted S&P 500 index also outperformed, gaining 0.7%.
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