The explosive popularity of Claude Code has reignited market fears about the software industry being disrupted by AI, leading to the worst annual start for US software stocks in years. Since the beginning of the year, a basket of SaaS stocks tracked by Morgan Stanley has fallen by a cumulative 15%, declining further after an 11% drop in 2025, marking the poorest start to a year since 2022. Valuation-wise, the software stocks tracked by Morgan Stanley are currently trading at 18 times their expected earnings for the next 12 months, hitting the lowest level on record and far below the average of over 55 times seen in the past decade. Panic sentiment spread rapidly after Anthropic launched a new service named "Claude Cowork" on January 12th. As previously mentioned, the latest version of Claude Code, Claude Opus 4.5, has demonstrated astonishing capabilities. One user noted that they used the tool to complete a complex project in one week that would have originally taken a year. Many users have shared their experiences on social media of successfully developing their first software without having any prior programming knowledge. This sell-off has intensified the performance divergence between software companies and other sectors within the tech space. While the Nasdaq 100 Index approaches record highs, companies like ServiceNow Inc. have seen their stock prices fall to multi-year lows. TurboTax's parent company, Intuit Inc., plummeted 16% last week, its largest weekly drop since 2022; Adobe Inc. and Salesforce Inc. both declined by over 11%.
Despite valuations becoming highly attractive, Wall Street analysts point out that, faced with the disruptive uncertainty brought by AI, many buy-side institutions believe there is currently "no reason to hold" software stocks, and they see no catalyst for a valuation re-rating in the near term. Claude Code Intensifies Disruptive Fears The trigger for this sell-off was the release of a "research preview" service called Claude Cowork by Anthropic. According to the company, this tool can create spreadsheets from screenshots or draft reports based on various notes, and it was primarily developed rapidly using AI. Although the tool has not yet undergone comprehensive validation, Jordan Klein, a technology sector expert at Mizuho Securities, noted that the capabilities it demonstrates are precisely what investors have been fearing, reinforcing the increasingly firm bearish stance on software stocks in the market. According to a Bloomberg report, Bryan Wong, a portfolio manager at Osterweis Capital Management, stated, "The news from Anthropic highlights the difficulty in assessing future growth prospects. The pace of change is unprecedented, which also brings uncertainty about the future to a peak." In a report to clients on January 14th, Klein bluntly stated that many buy-side investors believe that, regardless of how cheap the stock prices are or how much they have fallen, there is currently no reason to hold software stocks because there is no catalyst to drive a valuation recovery. Slow Progress in Software Companies' AI Transformation Most software manufacturers have yet to demonstrate significant appeal for their own AI products. Salesforce has been promoting the adoption of its Agentforce product, but the boost to revenue has not been significant. Adobe has integrated generative AI features into its photo and video editing software but did not update some AI-related metrics in its latest quarterly earnings report in December. Wong mentioned that existing software companies have advantages in areas like distribution and data, but they need to show accelerating growth to drive a stock price rebound, which seems unlikely in the short term. According to Bloomberg Intelligence data, the earnings growth for software and service companies in the S&P 500 is projected to slow from about 19% in 2025 to 14% in 2026. In contrast, the fundamental outlook for other tech sectors is more optimistic. Due to commitments from tech giants like Microsoft, Amazon, Alphabet, and Meta Platforms to heavily invest in AI infrastructure this year, chip manufacturers like Nvidia have clearer visibility into revenue growth. According to Bloomberg Intelligence data, semiconductor-related stocks are expected to see profit growth of nearly 45% in 2025, accelerating to 59% in 2026. "The reason chip makers are performing well is that their fundamentals are improving substantially, and given their customer base, there is higher certainty of growth," said Jonathan Cofsky, a portfolio manager at Janus Henderson Investors. "Meanwhile, the uncertainty about how AI will change the software ecosystem is much greater." Low Valuations Spark Divergence Despite valuations falling to historic lows, there remains a divergence of opinion regarding the prospects for software stocks. "Software companies commanded high valuation multiples because of their subscription-based models and recurring revenue that could be extrapolated almost indefinitely," Wong said. "If they have to compete against AI agents that operate around the clock, can complete tasks, and finish large projects in a single day, it's difficult to know what multiple they should trade at." However, some Wall Street institutions are optimistic about a rebound in the sector. Barclays expects software stocks to "finally turn a corner" in 2026, citing stable customer spending and attractive valuations. Goldman Sachs anticipates that rising AI adoption will provide more tailwinds for software companies by expanding the total addressable market. D.A. Davidson believes that 2026 is a good time to selectively re-enter the sector, as the narrative has overwhelmed the fundamentals of many software companies. "We can't yet say the inflection point has arrived, as existential concerns about AI will persist for a while, but the sector does look more attractive," said Chris Maxey, Managing Director and Chief Market Strategist at Wealthspire, which manages $580 billion in assets. "The sector isn't yet a clear buying opportunity, but we are getting closer to that point."
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