Wall Street's skepticism towards the software sector has been brewing for some time, but recent market sentiment has escalated from bearish to near-apocalyptic levels, with traders offloading shares across the entire industry as concerns mount over the potentially disruptive impact of artificial intelligence. "We're calling it the 'SaaSpocalypse'—the end for Software-as-a-Service (SaaS) stocks," said Jeffrey Favuzza from Jefferies' equity trading desk. "The trading right now is essentially a 'get me out' style of selling." This anxiety was further highlighted on Tuesday. AI startup Anthropic released an efficiency tool for corporate legal departments, causing a sharp decline in the stock prices of legal software and publishing companies. Selling pressure was evident across the entire sector: the London Stock Exchange Group, which has a large data analytics business, fell as much as 7.9%, while Thomson Reuters plunged nearly 11% in US pre-market trading. Market concerns about risks in the software industry have been developing for months, and the launch of Anthropic's Claude Cowork tool in January amplified fears of industry disruption. Last week, the sell-off even spread to gaming stocks after Alphabet began rolling out Project Genie, a system that can generate immersive worlds from text or image prompts. Overall, the S&P North American Software Index has fallen for three consecutive weeks, with a cumulative January decline of 15%, marking its worst monthly performance since October 2008. "I ask clients, 'What's your must-buy level?' But even with this scale of capitulation selling, I'm not hearing anyone express clear confidence at any particular price point," Favuzza said. "People are selling everything, completely disregarding the price." Concerns are also spreading to the private equity arena. According to informed sources, some firms, including Arcmont Asset Management and Hayfin Capital Management, are hiring advisors to assess which businesses in their portfolios might be more vulnerable to disruption. Apollo nearly halved its direct lending fund's exposure to the software sector from about 20% at the start of the year, targeting 2025. For US publicly listed companies, data compiled by Bloomberg shows that so far this earnings season, only 71% of software companies in the S&P 500 have beaten revenue expectations, lower than the overall technology sector's rate of 85%. Of course, some professional investors view this downturn as an opportunity. The Sycomore Sustainable Technology Fund—a European open-end fund that has outperformed 99% of its peers over the past three years—bought Microsoft shares during the decline, betting that the company will ultimately emerge as a winner in the AI race. Jonathan Krinsky, Chief Market Technician at BTIG, wrote in a report to clients last week that the software sector "may be sufficiently oversold to be ripe for a bounce." However, he added, "it will take a long time to repair and establish a new base," and due to the Relative Strength Index accelerating its decline in the fourth quarter of last year, "we have been unfavorable on the software group for some time." For investors looking to buy software stocks, the core challenge lies in distinguishing the AI winners from the losers. Clearly, some of these companies will succeed amidst the transformation, making their stocks effectively "on sale" after the recent plunge; but it might be too early to tell who the winners will be. "The harsh view is that, looking forward, the software industry could become the next print media or department store industry," said Jefferies' Favuzza. "When sentiment swings all the way to 'sell everything,' it implies there are very attractive opportunities embedded within. But we are all waiting for acceleration; when I look at the data for 2026 or 2027, it's hard to see the upside. If even Microsoft is under pressure, you can imagine how bad it could be for companies that are more impacted or lack the same dominant position."
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