Software stocks are down mainly because investors are worried that artificial intelligence will disrupt traditional software business models, while growth is slowing and money is rotating into “picks-and-shovels” AI plays like chips and data centers instead of SaaS and enterprise apps.

The big picture: why now?

Several forces hit the sector almost at once in late 2025 and early 2026.

  • Post‑pandemic software demand is normalizing after years of pull‑forward.
  • Revenue growth guidance from big names like SAP, ServiceNow, and Microsoft has underwhelmed expectations.
  • At the same time, AI infrastructure (chips, data centers) is showing clearer revenue benefits than software, so investors are rotating out of software into those winners.

Think of it as a mood swing on Wall Street: the story shifted from “software is unstoppable” to “prove that you can grow and survive AI.”

Key reasons software stocks are down

1. AI disruption fears

Investors are increasingly asking whether AI makes a lot of current software less valuable or easier to replace.

  • Some worry that customers will build their own tools using foundation models instead of paying high-priced SaaS subscriptions.
  • The launch of new AI tools, like Anthropic’s Claude Cowork, has reinforced the idea that you can auto‑generate spreadsheets, reports, and internal tools, potentially undermining parts of the traditional software stack.
  • Analysts describe sentiment as among the worst they’ve seen, with markets “pricing in” a worst‑case scenario where many business apps get commoditized.

“No reasons to own” – that was essentially the tone some institutions took about software after new AI tools appeared in January, which spooked the market further.

2. Slowing growth and disappointing guidance

Several flagship software companies have signaled slower‑than‑hoped growth, especially in cloud and enterprise spending.

  • SAP warned of a “slight slowdown” in cloud revenue for 2026 and saw its stock drop about 15% in a day.
  • ServiceNow shares fell more than 10% despite beating on recent revenue, because future outlooks and growth quality did not excite investors enough.
  • Microsoft reported heavy AI investment but a slowing trajectory in cloud growth; the stock pulled back about 10%, which dragged broader software sentiment down.

In markets, expectations matter as much as actual numbers: if guidance doesn’t accelerate with all the AI hype, investors see that as a red flag.

3. Rotation into AI “infrastructure” winners

The clearest financial payoff from AI so far has shown up in semiconductors and data‑center infrastructure, not in most software names.

  • Chipmakers and hardware players have strong order books tied to AI training and inference.
  • By contrast, software companies are spending heavily on AI features and compute, but the revenue uplift is still uncertain or slow to materialize.
  • This has fueled a classic “sector rotation”: money moves from software into the parts of tech where AI upside is more visible.

So even if a software firm is fundamentally fine, it can still get hit because investors want more exposure to the current AI winners.

4. Valuation comedown after years of hype

Software traded at very rich valuations through the 2010s and the pandemic boom, thanks to high margins and recurring revenue.

  • Many names were priced for years of 20–30%+ growth and near‑perfect execution.
  • When growth cooled and AI risks appeared, those high multiples started to look unsustainable.
  • The result: multiple compression—stocks fall not because the business collapsed, but because investors are willing to pay less for each dollar of revenue.

This is part of a longer reset that began in 2022–2023 but is now in a new, AI‑driven chapter.

5. Macro and enterprise‑spending fatigue

The surge in software spending during the pandemic created a hangover.

  • Many businesses front‑loaded digital transformation, so there’s less “new” demand now.
  • With higher rates still in the background and budgets tighter, CIOs scrutinize renewals and expansions more carefully.
  • That translates into slower net‑new deals and more pressure on upsells.

Analysts describe the current environment as a “normalization” or mild slowdown, but because valuations were high, the price impact is exaggerated.

What the numbers and names look like

Here’s a snapshot of how some major software names have been hit recently.

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Company / Group Recent move Context
SAP Down ~30% over past 6 months; ~15% in a single day after 2026 outlook.Guided for cloud slowdown; market worried growth is decelerating in a key enterprise bellwether.
ServiceNow (NOW) Down roughly 40% from recent highs; double‑digit drop after earnings.Beat near‑term numbers but outlook and AI spending failed to impress investors.
Intuit (INTU) Down about 16% in a week, one of the worst S&P 500 performers YTD.Hit hard by fears tax/finance software could face AI disruption.
Salesforce (CRM) Down over 20% in recent months.Dragged down by sector sentiment and questions about long‑term pricing power in CRM.
Workday (WDAY) Down around 8–20% depending on timeframe, including steep single‑day drops.Concerns about enterprise HR/finance software demand and competition.
iShares Tech‑Software ETF (IGV) Worst day in ~10 months, down nearly 5% on a single session; down double digits YTD.Shows the weakness is broad‑based, not just one or two names.
Morgan Stanley SaaS basket Down ~15% year‑to‑date, after an ~11% drop in 2025.Captures sustained underperformance of high‑growth SaaS.

What forums and pros are debating

On forums like Hacker News and in analyst notes, there’s an active argument about how much damage AI will really do to the software sector.

  • One side: A lot of business software is “good enough” and could be rebuilt cheaply with AI tooling plus basic frameworks, especially internal apps.
  • The other side: Enterprise‑grade products still have deep moats in compliance, integration, security, and support; AI is more likely to augment them than erase them.
  • Many professionals describe the current phase as a messy “reckoning” where winners and losers will diverge sharply rather than the whole category dying.

Right now, markets are leaning pessimistic, which is why prices look so rough even though most businesses are still growing—just not fast enough to match the old narrative.

TL;DR

Software stocks are down because investors are:

  1. Scared that AI will undercut traditional software business models and pricing.
  1. Disappointed by slower‑than‑hyped growth and cautious guidance from big names.
  1. Rotating into AI infrastructure plays where revenue impact is clearer.
  1. Re‑rating lofty software valuations after a decade of exuberance.
  1. Adjusting to a post‑pandemic environment where enterprise software spending is less explosive.

Information gathered from public forums or data available on the internet and portrayed here.