‘Software mageddon’ is causing investors to hunt for bargains, but be wary

Wall Street’s ‘Software Mageddon’ has had a snowball effect. Now investors are debating whether it’s time to warm up to beaten-down stocks.The fallout for the software industry, which includes a handful of signature stocks from the recent bull market, reflects growing concerns about the potential disruption caused by artificial intelligence as investors increasingly divide the sector into perceived winners and losers. The volatility also comes as investors offload technology positions for other market areas that have largely lagged in recent years, as investors await quarterly updates during the heart of corporate earnings season that could further shake asset prices.

“The sell-off, which arguably started last quarter, is a manifestation of an awakening to the disruptive power of AI…,” said James St. Aubin, chief investment officer at Ocean Park Asset Management, Santa Monica, California. “Maybe this is an overreaction, but the threat is real and valuations need to take that into account.”The S&P 500 software and services index fell 13% last week, losing more than $800 billion in market capitalization in that time, driven by sharp declines at companies like Intuit, ServiceNow and Oracle. Compared to the broader S&P 500, the software group on Tuesday posted its worst quarterly performance since May 2002 amid the fallout from the bursting of the dot-com bubble, according to equity strategists at Evercore ISI.

These steep declines have generated technical signals that could indicate at least a temporary low for the group, and some portfolio managers have made modest buys in the beaten-up names. However, investors were hesitant to declare an all-clear signal.

“There is some long-term value in these names and they are getting to a point where I think they look more attractive,” said Jake Seltz, portfolio manager at Allspring Global Investments in Minneapolis, who has added “on the margin” to some positions in recent months, including ServiceNow and Monday.com. Seltz said he was waiting for catalysts to buy more aggressively, such as software companies reporting strong AI-related product revenues or more announcements from enterprise customers that they are deploying such software.

THE TURN OFF OF TECH STOCKS
Fears about the implications of a new tool from Anthropic’s major language model, Claude, prompted the latest bout of volatility, which was exacerbated by disappointing earnings reports, including from software giant Microsoft. The S&P 500 software index is down about 25% since its recent peak in late October – a period when the S&P 500 has changed little. Options traders showed a lack of appetite to pick up the battered software names.

“This was a Software Mageddon,” said Art Hogan, chief market strategist at B Riley Wealth.

The steep declines for software names also come amid a broader market rotation away from technology names and toward value and quality stocks in other sectors, such as consumer staples, energy and industrials, which until recently were less favored than technology during the bull market that began in October 2022.

“The right reason to sell these expensive companies is because there are other opportunities in businesses that are better valued and have more headroom, not because you’re panicking about a crash in software and technology companies,” said Jim Masturzo, chief investment officer at Research Affiliates.

LOOKING FOR VALUE AFTER AUTUMN
Whether that value is found in software is the debate facing investors. The biggest decliners so far this year include Intuit, ServiceNow and Salesforce. Microsoft is the worst performer among the “Magnificent Seven” mega-cap stocks this year. Other sharp declines this week included technology and content company Thomson Reuters, owner of legal database Westlaw and Reuters news agency.

The software swoon meant the group looked oversold on a technical basis, suggesting the company was close to “at least a near-term low,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. His company has made modest purchases of shares of ServiceNow and Microsoft in recent days.

While I’m not looking to “bet it all” on software, “I do think it’s starting to have value,” Todd said. “I don’t think this wholesale replacement of the existing software infrastructure for the AI ​​solution is realistic in these situations.”

Brad Conger, chief investment officer at Hirtle, Callaghan & Co., said he has begun weighing potential purchases of stocks including SAP, Adobe and Intuit, which have been hit hard by the selloff. “You could say they expect a recovery.”

But he added that he is not ready to become a buyer at current levels because he does not feel “comfortable that they have reached a level where the worst threat is priced in.”

For some investors, the fallout was similar to the rapid declines caused last year by the rise of the low-cost Deepseek AI model, which raised questions about the financial AI ecosystem.

“We are starting to get a better picture of the capabilities of AI. The market is adjusting some repricing, indicating less confidence in future software sales growth in an AI-driven world,” said Rene Reyna, head of thematic and special product strategy at Invesco. “Is it exaggerated? We can’t say yet. But sales can lead to more sales.”