The Great AI Reckoning: When Innovation Becomes Disruption
The stock market is experiencing a dramatic split. While traditional sectors are surging – energy companies are up more than 20 percent and materials companies are up 15 percent – a different story is unfolding in the technology and financial services sectors. Established players are seeing their valuations crumble as investors grapple with the answers to a simple question: Which companies will survive the artificial intelligence (AI) revolution?
The S&P 500’s near-flat performance this year masks a seismic shift beneath the surface. Energy and industrial stocks are rising while software companies, financial data providers and insurance brokers lose value. Some stocks are down 20 to 30 percent this year, and the most extreme ones are down 50 percent.
As an example, S&P Global (SPGI) fell 25 percent in a month after 2026 earnings estimates of $19.40-$19.65 missed the $19.96 consensus. The company now trades at 21 times consensus, the lowest multiple in five years.
Figure 1. S&P500 versus software (January 1, 2025 = 100)
Source: LSEG workspace
The sell-off accelerated as AI companies began unveiling tools, and plugins in particular, that undermine the Software-as-a-Service (SaaS) versions of established industry players. Each announcement caused new waves of panic:
As advanced AI assistants demonstrated capabilities in legal research, reviewing non-disclosure agreements (NDA), contract writing, financial analysis and sales automation, software companies saw their stocks plummet. Application software companies fell nearly 23 percent, while systems software players fell 15 percent. Dominant financial data providers such as Thomson Reuters and FactSet Research have seen their shares fall 30-60 percent as investors question whether AI can simply replicate their core services.
The contagion spread to asset managers and investment firms with significant exposure to software companies. While roughly $25 billion of software loans traded below 80 cents on the dollar, companies like KKR, Blackstone and Blue Owl have seen their shares fall 8 to 16 percent this year alone – and as much as 50 percent from their most recent highs.
Next it was AI tax preparation tools that analyze uploaded documents and generate personalized tax strategies, raising alarms about AI’s potential to automate accounting and financial advice. H&R Block shares have halved. Consulting firms are down 7 to 10 percent from their peaks.
The most recent blow came when AI chatbots began offering personalized insurance quotes within conversational interfaces. Major brokerages like Aon and Arthur J. Gallagher are down 10 to 18 percent this year, with some down nearly 40 percent from their highs.
Adapt or die
This will all feel eerily familiar to anyone who remembers the advent of the Internet. At the time, retailers, media companies and service providers were faced with similar existential questions. Some adapted and prospered (Walmart). Others emerged from obscurity to dominate (Amazon). Many, like newspapers, suffered as secret revenue streams were eroded and audiences became fragmented.
It has always been true that new General-Purpose Technologies (GPTs) disrupt the world. As Table 1 shows, general-purpose technologies have transformed economies throughout history by making entire industries obsolete.
Table 1. General Purpose Technologies (GPTs) and Disrupted Industries
| Technology (Period) | Industries that went under |
| Steam engine (1760-1850) |
• Handloom weavers • Canal boat operators • Sailing ship builders • Traditional blacksmithing • Stagecoach services |
| Electricity (1880s–1920s) |
• Gas lighting companies • Ice mining industry • Manufacturers of water wheels • Telegraph operators (partially) • Manual elevator controls |
| Internal combustion engine (1890s–1930s) |
• Horse breeders and stables • Blacksmiths and farriers • Manufacturers of buggies and carriages • Stabling stables • Freight transport over short distances by rail |
| Transistor/semiconductor (1950s and 1980s) |
• Vacuum tube manufacturers • Manufacturers of slide rules • Mechanical calculator companies • Typewriter manufacturers • Analog switchboard operators |
| Personal computer (1980s and 2000s) |
• Typewriter industry • Encyclopedia publishers (print) • Film-based typesetting • Video rental stores • Music stores • Bookstores (many independent) • Print newspaper advertisements |
| Internet (1990s–present) |
• Dial-up ISPs • Video rental chains (e.g. Blockbuster) • Print Yellow Pages • Traditional print media • Landline telephone services • Traditional retail (many sectors) • Traditional taxi services • Traditional hotel booking |
A pattern has emerged within the rise of AI and the associated disruption. That pattern suggests that domain expertise may be the differentiator. AI will disrupt businesses whose primary value lies in technical execution. But companies that offer deep knowledge of specific industries – their workflows, regulations and nuances – maintain a defensible position, at least for now.
For now, Chief Technology Officers (CTOs) are unlikely to entrust mission-critical operations to unproven AI startups, no matter how impressive their demonstrations.
A valuation opportunity?
Where it gets interesting is where forward price-to-earnings (P/E) ratios have compressed dramatically. Software and data companies aren’t yet priced as if the underlying business models are permanently broken, so the odds aren’t hitting you in the face, but…
According to Ed Yardeni, application software earnings have fallen from 35x to 24x, system software price-to-earnings ratios have fallen from 36x to 23x, financial data providers have seen their price-to-earnings ratios fall from 30x to 23x, insurance brokers have gone from 25x to 16x, and asset managers have fallen from 19x to 16x.
For now, these companies are still expected to grow their profits by 8 to 20 percent. Provided price-earnings ratios do not decline further, and provided earnings growth estimates are correct, investors can achieve an Internal Rate of Return (IRR) of 8 to 20 percent. The market is factoring in significant uncertainty as to whether AI competition will force downward revisions to these projections as contracts are renewed.
For investors confident that incumbents will adapt successfully, these valuations present opportunities. The risk is of course that the profit estimates themselves turn out to be too optimistic or that price-earnings ratios fall further.
However, the scale of the actual disruption will depend almost entirely on the use of AI.
In financial markets, for example, AI threatens to commoditize information services, while potentially opening up new opportunities for companies that successfully integrate them with proprietary expertise.
Companies that see AI as a tool rather than a threat and are willing to experiment now with how to integrate it will be best positioned for what comes next. Those who assume that their historical advantages confer immunity are today’s ostriches burying their heads in the sand. They will see their assumptions – and valuations – evaporate in real time.
The question is not whether AI will transform industries. It’s already happening. The question is: who will adapt quickly enough to stay relevant once the transformation is complete?
He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.
Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
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