Software stocks are sharply declining as worries about artificial intelligence disrupting established business models intensify. The iShares Expanded Tech-Software Sector ETF (IGV) fell approximately 5% in early trading, marking its biggest single-day loss since last April, and pushing the software sector officially into a bear market with a 21% drop from its recent peak.
This month alone, the IGV has plummeted nearly 14%, on track for its worst performance since October 2008. Investors are increasingly skeptical of traditional software companies amid fears that AI and automation tools could significantly reduce demand for licensed software and subscription services in the long run.
ServiceNow’s Sharp Decline on Earnings Report
ServiceNow, a major software player, plunged 11% following its earnings announcement. Morgan Stanley analysts described the results as "good, but not good enough," emphasizing that investor skepticism about legacy application vendors remains high. The company’s steady growth matched expectations but failed to shift the negative narrative.
CEO Bill McDermott addressed concerns on the earnings call, arguing that fears of AI completely displacing software vendors are misguided. He highlighted ServiceNow’s role as a “semantic layer” integrating AI into enterprise workflows, which he believes will drive future value. McDermott stressed the continuing importance of workflow software, since AI’s probabilistic nature requires structured business processes for consistent outcomes.
Wider Sector Weakness and AI Pressures
Pressure across the sector deepened as investors reassess the sustainability of subscription growth amid rapid AI innovation. For example, Microsoft shares dropped about 10% after reporting slower cloud revenue growth and issuing cautious guidance for its upcoming quarter. This represented Microsoft’s steepest one-day decline since March 2020.
Anthropic’s rapid release of its Claude Opus 4.5 AI model has added to investor anxiety. The model, highly skilled in coding and managing complex business tasks, is being quickly adopted by engineers and knowledge workers. “It is a little embarrassing” that Anthropic outpaced Microsoft in AI innovation recently, according to Ben Reitzes of Melius Research. He warned that investor patience with incumbent tech giants might be running thin.
European Software Giants Also Struggling
SAP, a leading German software company, saw shares drop as much as 14%. The company reported its cloud contract backlog grew 16% to €21.1 billion, missing the expected 26% increase. UBS analysts labeled the results a “disappointment,” further signaling challenges for established software vendors in the cloud transition era.
Summary of Key Data Points
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iShares Expanded Tech-Software Sector ETF (IGV)
- One-day drop: ~5%
- Monthly drop: ~14%
- Year-to-date decline pushing it into bear market territory (-21% from peak)
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ServiceNow (NOW)
- Stock decline: 11%
- Earnings: Stable growth but missed expectations to shift sentiment
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Microsoft (MSFT)
- Stock decline: ~10%
- Cloud growth slowdown; softer margin outlook
- SAP
- Stock decline: up to 14%
- Cloud backlog growth: 16% vs. expected 26%
The ongoing sell-off highlights how rapidly investor sentiment can shift in response to emerging technologies. While AI promises transformation across industries, it is also generating significant uncertainty about the future earnings potential of traditional software companies. Investors now face mounting questions about which firms can effectively integrate AI or risk losing market share to more agile competitors reshaping the enterprise technology landscape.
Read more at: www.cnbc.com-
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