The main concerns on Wall Street this week can be summarized as follows: Are the software sales going too far, or do they signal the AI bubble is about to burst? Software stocks continued to fall on Thursday, with the iShares Expanded Technology Software Sector ETF (IGV) down more than 9% since the start of the week. Anthropic’s latest updates to Claude raise concerns that agent AI poses an existential threat to an industry that relies on selling enterprise software packages to as many individual users as possible. Software stocks entered a bear market last week and are now down nearly 30% from their recent highs. After exorbitant trading over the past few years, investors objected to the deal, which was seen as too crowded and expensive. IGV surged more than 58% in 2023 and more than 23% in 2024. In 2025, it rose by just over 5%. Those who feel the drop is too far argue that agent AI cannot meaningfully harm industry incumbents. They predict it could be as fleeting as DeepSeek AI was on the scene this time last year. The Chinese company shocked the industry last year by announcing an open-source AI model developed at very low cost. John Campbell, head of the Systematic Core Equity team at Allspring Global Investments, is also in the camp. “The decline in software has gone too far,” he wrote. “Many established players will not be easily disrupted by agent AI; they are actively developing their own agents to improve the functionality and profitability of their existing software.” Software on Sale If anything, many see the pullback as an opportunity to buy. Some said they were waiting for the drawdown to get even bigger before intervening and urged investors to pick winners carefully. Fred Hickey, a longtime technology analyst, dismissed the software rout. He said software stocks were on his short list to buy if the broader sector suffers a wave of trader capitulation, as he expects. “I think that argument is largely…bullshit. As a result, I have considered buying some shares,” Hickey said in his Tuesday newsletter. “However, after considering the valuation, we determined it was still too high, especially when taking into account stock-based compensation.” Jefferies said 73% of software stocks are oversold, an eight-year high. In fact, Tyler Radke, co-head of U.S. software equity research at Citigroup Research, told CNBC’s “Power Lunch” Wednesday that investors can start selectively adding companies “that will be relevant as we get to the other side of this AI trade.” His preference is for companies exposed to hyperscale data volumes. Microsoft, MongoDB, and Snowflake are at the top of his list. “First Victim” To be sure, some worry that the slide could be even worse. Greg Swenson, co-portfolio manager of the Leuthold Select Industries Fund, said even if there is a short-term rebound, there could be more “washout.” He noted that IGV trades at a P/E ratio of just under 40 times, making it more attractive than it has been in the past, but not cheap. “Things typically don’t tend to bottom out at historical median or average levels or whatever,” Swenson told CNBC. “When you have this kind of emotional sell-off, like this one, you tend to experience quite a bit of difficulty.” He also worried that the selloff could last longer than investors expected. He said that unlike the temporary effects of deep-seeking, this selloff could be indicative of deeper problems in the tech industry as a whole, even among hyperscalers that are ramping up capital spending and increasing debt. “I think this is probably a more durable move,” Swenson said. That could have an impact on more than just software stocks. Companies with private credit such as Blue Owl and Ares Management collapsed. Week-to-date, the pair is down 9% and 16%, respectively. Hardika Singh, economic strategist at Fundstrat Global Advisors, told CNBC that she expects the decline in stocks to be “outdone,” but will keep an eye on how software companies fare going forward. If they can adapt to changes in technology, that’s a healthy signal for the AI industry, she says. “If they can revamp here and pivot here, that would be great. The sell-off will ultimately be like a ‘deep-seek moment,’ where you’ll forget about it in a year, but this is just like a healthy adjustment,” she said. “But if they can’t reinvent themselves, I think this is an AI trade disconnect.” If that happens, she added, software will be “the first casualty of AI industrialization in this economy.” Continuing rotation More than anything, this measure confirmed this year’s bias towards other parts of the market. Demand was seen in “real economy” sectors such as energy, industrials and materials, which would benefit from data center expansion. Larry McDonald, author of the Bear Traps report, said he favors global value stocks that have the potential to outperform as money continues to circulate through the economy. Ultimately, he noted, it would take at least a $30 trillion outflow from the Nasdaq Composite to bring about significant changes in other parts of the market. That seemed to be the case this week as well. As of Thursday, only the Dow Jones Industrial Average had increased since the beginning of the week. The equally weighted S&P 500 index also outperformed, rising 0.7%.
