To The Moon

Goldman Sachs has likened the current software sector to the newspaper industry upended by the internet in the early 2000s and the tobacco industry hit with stringent regulatory crackdowns in the late 1990s in its analysis. The firm argues that the ongoing valuation decline reflects not short-term earnings volatility, but a fundamental doubt over the sustainability of the software industry’s long-term growth and profit margins. Only when earnings expectations truly stabilize can stock prices complete the bottoming process.

When Wall Street starts referring to software stocks as "the newspaper industry", the market’s fear of the AI impact has reached an extreme phase.

According to the Zhuifeng Trading Desk, Goldman Sachs analyst Ben Snider and his team made a rare comparison in their newly released report, likening the current software sector to the newspaper industry upended by the internet in the early 2000s and the tobacco industry hit with stringent regulatory measures in the late 1990s. This analogy alone speaks volumes about how Wall Street is pricing in the "AI impact on software business models".

Goldman Sachs argues that the current valuation decline reflects not short-term earnings volatility, but a fundamental doubt over whether the software industry’s long-term growth and profit margins can remain sustainable.

The firm cautions that when a sector is deemed by the market to face disruptive risks, a stock price bottom depends on the stabilization of earnings expectations, not on valuations becoming cheap enough.

From "AI Dividend" to "AI Threat": Software Stocks Face a Collective Re-rating

Goldman Sachs points out that software stocks have become the "epicenter" of the AI impact narrative over the past week. The software sector plummeted 15% in a single week, marking a cumulative 29% pullback from its September 2025 peak, while Goldman Sachs’ proprietary "GS AI at Risk" basket has tumbled 12% year-to-date.

The immediate catalysts for the shift in market sentiment include the launch of Anthropic’s Claude collaboration plug-ins and Google’s Genie 3 model. In investors’ eyes, these developments are no longer merely about "boosting productivity"—they are starting to directly threaten software companies’ pricing power, moats, and even their very existence.

Goldman Sachs explicitly states in the report that the market is no longer just debating earnings downgrades, but rather whether the software industry is heading for a long-term decline akin to that of the newspaper industry.

Valuations Seem to "Return to Rationality", but the Market Is Betting on a Growth Collapse

On the surface, software stock valuations have fallen sharply:

• The software sector’s forward price-to-earnings (P/E) ratio has dropped from approximately 35x at the end of 2025 to around 20x currently, hitting its lowest level since 2014;

• Its valuation premium relative to the S&P 500 has also fallen to a multi-decade low.

But Goldman Sachs emphasizes that the problem lies not in valuations themselves, but in the collapse of the assumptions underpinning those valuations.

The report shows that the software industry’s current profit margins and consensus expected revenue growth rates remain at their highest levels in at least 20 years, significantly outpacing the S&P 500 average. This means the market’s valuation slump implies expectations of a sharp downward revision to future growth and profit margins.

A horizontal comparison by Goldman Sachs reveals:

• In September 2025, when software stocks traded at a 36x P/E ratio, they were priced for a mid-term revenue growth expectation of 15%–20%;

• Today, a valuation of around 20x P/E implies a growth assumption that has fallen to the 5%–10% range.

In other words, the market is pricing in an impending "growth cliff" in advance.

The Warning of the "Newspaper Moment": Valuations Do Not Mark the Bottom—Stable Earnings Do

What has drawn the most market attention in this report is Goldman Sachs’ reference to historical cases.

Goldman Sachs reviews that the newspaper industry’s stock prices plummeted an average of 95% between 2002 and 2009, and the true bottom was not reached when the macroeconomy improved or valuations turned cheap, but only after consensus earnings expectations stopped being revised downward.

A similar scenario played out in the tobacco industry in the late 1990s: before the Master Settlement Agreement was finalized and regulatory uncertainty lifted, tobacco stocks remained under sustained pressure even as their valuations were sharply compressed.

Based on these cases, Goldman Sachs has reached a rather sober, even pessimistic, conclusion:

Even if short-term financial reports show resilience, it is not enough to negate the long-term downside risks posed by AI.

Capital Votes with Its Feet: Shunning "AI Risks" and Embracing the "Real Economy"

Against a backdrop of rising AI uncertainty, market preferences are shifting toward shunning "AI risks" and embracing the "real economy".

Goldman Sachs data shows that hedge funds have sharply cut their exposure to the software sector in recent times (though they remain net long overall), while large mutual funds have been systematically underweight on software stocks since mid-2024.

At the same time, capital has clearly flowed into sectors deemed to face "lower AI impact", including typical cyclical industries such as industrials, energy, chemicals, transportation, and banking. Goldman Sachs notes that its tracked Value factor and industrial cyclical portfolios have both significantly outperformed the broader market in recent times.

While the overall tone is cautious, Goldman Sachs has not turned outright bearish. Its analyst team believes certain sub-sectors remain defensive:

1. Vertical software, deeply embedded in industry workflows with high customer switching costs, is far less susceptible to direct AI substitution;

2. Information and business services firms with proprietary data and clear industry barriers may have had the AI impact on them overestimated by the market;

3. Some companies highly related to software but with non-pure software business models have shown signs of being "unfairly sold off" in recent times.

But the core premise remains clear: only when earnings expectations truly stabilize can stock prices complete a bottoming process.

If the core narrative for software stocks over the past two years was "AI will amplify growth", this Goldman Sachs report marks a turning point—the market is now seriously debating whether AI will erode the intrinsic commercial value of software itself. The real question is not whether software stocks can rebound, but which software companies can prove they will not become the next newspaper industry.