Wall Street’s unease with software stocks has been building for months, but sentiment has recently shifted from bearish to doomsday.
“We call it the ‘SaaSpocalypse,’ an apocalypse for software-as-a-service stocks,” said Jeffrey Favuzza of Jefferies. “Trading is very much ‘get me out’ style selling.”
That sense of urgency intensified after AI startup Anthropic released a productivity tool aimed at in-house legal teams. The announcement sparked sharp declines across legal software and data-driven publishing firms, underscoring investor anxiety around AI-driven substitution risk. London Stock Exchange Group fell 13%, Thomson Reuters plunged 16%, CS Disco dropped 12%, and LegalZoom sank 20% in a single session.
AI Disruption Fears Spread Beyond Software
Concerns over AI’s impact are no longer confined to niche corners of the software market. The January release of Anthropic’s Claude Cowork tool amplified fears that AI could compress pricing power and weaken entrenched business models. Similar worries spilled into video-game stocks last week after Alphabet began rolling out Project Genie, which can generate immersive digital worlds from simple prompts.
The damage is already visible in the numbers. The S&P North American software index is on a three-week losing streak and fell 15% in January alone – its worst monthly performance since October 2008.
“I ask clients, ‘what’s your hold-your-nose level?’” Favuzza said. “People are just selling everything and don’t care about the price.”
Private Equity and Earnings Add to the Pressure
Private equity firms are also reassessing exposure, with several hiring consultants to evaluate which portfolio companies may be most vulnerable to AI disruption. Apollo, for example, cut its direct lending funds’ software exposure nearly in half during 2025.
Earnings season has done little to restore confidence. Only 67% of software companies in the S&P 500 have beaten revenue expectations so far, compared with 83% across the broader tech sector. Even where earnings beats occurred, concerns about long-term growth have outweighed near-term results.
Microsoft’s recent report highlights the challenge. Despite solid earnings, worries about slowing cloud growth and heavy AI spending pushed the stock down sharply. January marked Microsoft’s worst month in more than a decade, reinforcing the view that even industry leaders are not immune.
Valuation Reset or Opportunity?
Not all companies have been swept away equally. Palantir delivered a bullish revenue outlook and posted 70% fourth-quarter revenue growth, sending its shares higher. Still, investors remain wary of how AI will reshape competitive dynamics across the broader sector.
“The fear with AI is that there’s more competition, more pricing pressure, and that their competitive moats have gotten shallower,” said Thomas Shipp of LPL Financial. “The range of outcomes for their growth has gotten wider.”
Those fears have already prompted analyst downgrades, with concerns that “seat-compression and vibe coding narratives could set a ceiling on multiples.”
At the same time, some long-term investors see opportunity emerging from the wreckage. Select funds have begun buying large-cap software names, betting that industry leaders will ultimately adapt and benefit from AI rather than be displaced by it. On a valuation basis, parts of the sector now trade at levels not seen in years, with technical indicators suggesting oversold conditions.
The software sector is “probably oversold enough for a bounce,” wrote BTIG’s Jonathan Krinsky, though he cautioned that “it is going to take a long time to repair and build a new base.”
Separating Winners From Losers
For investors, the core challenge is determining which software companies will emerge stronger in an AI-first world. Some may thrive as platforms and infrastructure providers, while others could face structural decline.
“The draconian view is that software will be the next print media or department stores,” Favuzza said. Yet he also noted that extreme pessimism can create opportunity, even if clarity remains elusive. “That the pendulum has swung so far to the sell-everything side suggests there will be super-attractive opportunities that come out of this.”
For now, uncertainty dominates. With AI accelerating change faster than most valuation models can absorb, the SaaSpocalypse may be less about panic, and more about a long-overdue reset in how software businesses are priced.
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