AI fears sharply hit software stocks: Is it an "illogical" panic or the end of SaaS?

Anthropic’s new AI tools released this week triggered a massive sell-off in software stocks, as investors reassess which software companies can survive in the AI era.

The S&P 500 Software and Services Index fell over 4% overnight, marking the eighth consecutive trading day of decline, with a year-to-date drop of approximately 20%. Companies like Thomson Reuters, Salesforce, and LegalZoom saw their stock prices suffer heavy losses this week, and the sell-off has extended to Asian IT firms Tata Consultancy Services and Infosys.

Anthropic’s new tools for its Claude"Cowork" AI agent are designed to handle complex professional workflows, which are core products for many software and data providers. These AI agents target functions such as legal and technical research, customer relationship management, and analytics, sparking concerns that AI could weaken traditional software business models.

Nvidia CEO Jensen Huang on Wednesday called this panic “the most illogical thing in the world,” but hedge funds have shorted about $24 billion worth of software stocks this year, indicating that institutional investors remain cautious about the industry’s outlook.

Tech Leaders Push Back: Is AI a Threat or an Enhancer?

Huang explicitly dismissed market concerns during an event on Wednesday. “There is a view that the software industry is in decline and will be replaced by AI,” he said, “and that is the most illogical thing in the world.” The influential tech leader believes AI will use and augment existing software tools rather than completely reshape them.

Arm Holdings CEO Rene Haas also echoed this view this week. During a earnings call, he stated that enterprise AI deployment is still in its early stages and has not yet caused large-scale transformative impacts. According to the Financial Times, Haas described recent market panic as “micro-hysteria.”

Anthropic announced the launch of what it calls an improved AI model on Thursday, just days after its latest Claude tool triggered investor panic.

Analyst Divergence: Doomsday Scenario or Profit Pressure?

Wedbush Securities echoed Huang’s perspective in a research report on Wednesday, stating that although AI poses headwinds for software providers, the sell-off reflects a “doomsday scenario for the industry, which is far from reality.”

The firm pointed out, “Companies will not completely overturn hundreds of billions of dollars of previous software infrastructure investments and migrate to companies like Anthropic, OpenAI, etc.” Wedbush Securities noted that large enterprises have spent decades accumulating trillions of data points, which are now deeply embedded in their software infrastructure.

However, other analysts foresee more lasting pressure. Constellation Research, a consulting firm, said Wednesday that the sell-off reflects concerns that AI could compress profits and limit software companies’ pricing power, rather than signaling the industry’s death.

Futurum Group tech stock analyst Rolf Bulk told CNBC, “SaaS is likely to be eroded by AI-driven workflows, which will impact valuation multiples in the industry.”

Who Can Survive in the AI Era?

Despite concerns, Bulk believes that some software providers—especially those running mission-critical enterprise workloads, such as Oracle and ServiceNow—still hold ongoing “profit rights.” He added that the depth of their data and their entrenched position in customer workflows make them more likely to coexist with AI rather than be completely replaced.

Market data and research firm AlphaSense is betting on this strategy, as it extensively integrates AI tools into its products. AlphaSense Senior Vice President Chris Ackerson told CNBC, “The future belongs to those who combine advanced AI with trustworthy content, explainability, and deep domain expertise.”

Concerns in the software industry predate the recent sell-off. As of Wednesday, hedge funds have shorted about $24 billion worth of software stocks this year. Short sellers borrow shares and sell them, aiming to buy them back later at lower prices for profit.

This week’s sell-off indicates that investors are reassessing which software companies can coexist with AI in the long term, and there remains significant disagreement on this issue.

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