Software Stocks Plunge on ServiceNow and IBM Earnings Disappointment, AI Disruption Fears

Software stocks experienced a significant decline on Thursday, driven by disappointing earnings reports from ServiceNow and IBM. Ongoing market concerns that artificial intelligence could partially replace traditional software companies contributed to the sell-off, with Salesforce, Workday, and Oracle also posting substantial losses. ServiceNow noted that the conflict in the Middle East was a significant factor negatively impacting its performance.

Against the backdrop of the US government accelerating the adoption of AI tools, ServiceNow has introduced discounts of up to 30% for federal agencies to boost product uptake. The dismal earnings from ServiceNow and IBM, combined with growing fears that AI tools and services will disrupt established businesses, led to a broad decline in US software stocks on Thursday. ServiceNow shares plummeted 17% on Thursday, potentially marking its largest single-day drop ever. Although the company slightly exceeded Wall Street's profit expectations on Wednesday, it stated that Middle East tensions are significantly impacting its current quarter's subscription revenue. IBM reported revenue and profit that beat expectations and maintained its full-year guidance, yet its stock still fell sharply by 9%. Other individual stock performances included: Salesforce and HubSpot each declining approximately 9%; Adobe and Intuit down about 7%; Oracle falling around 5%; and Workday dropping 10% on Thursday, bringing its year-to-date loss to over 45%. The iShares Expanded Tech-Software Sector ETF (IGV), which tracks the software sector, fell about 5% on Thursday and is down 18% for the year. The prevailing bearish sentiment towards the sector stems from a core concern: AI tools from companies like Anthropic and OpenAI could potentially disrupt the long-established cloud subscription business model. Earnings reports from major technology giants are concentrated for release next week: Alphabet (Google), Amazon, Meta, and Microsoft are scheduled to report on Wednesday, with Apple following the next day. Compared to pure-play software vendors, diversified technology leaders have shown more resilience, primarily benefiting from their strategic positioning within the AI trend. Among these, Microsoft, which has the highest exposure to software revenue, has been the weakest performer, declining 14% year-to-date.