AI fear leads to a sharp decline in software stocks: Is it a "completely illogical" panic, or the end of SaaS?

Anthropic's new AI tools released this week have triggered a massive sell-off in software stocks, as investors reassess which software companies can survive in the AI era. The S&P 500 Software and Services Index fell over 4% overnight, marking its eighth consecutive trading day of decline, with a cumulative drop of about 20% year-to-date. Companies like Thomson Reuters, Salesforce, and LegalZoom have seen their stock prices hit hard this week, and the sell-off has spread to Asian IT firms Tata Consultancy Services and Infosys. Anthropic's new tools developed for its Claude "Cowork" AI agents aim to handle complex professional workflows, which are core products for many software and data providers. These AI agents target functions such as legal and technical research, customer relationship management, and analytics, raising concerns that AI could undermine traditional software business models. NVIDIA CEO Jensen Huang stated on Wednesday that this panic is "the most illogical thing in the world," but hedge funds have shorted about $24 billion in software stocks this year, indicating that institutional investors are cautious about the industry's outlook. Tech Leaders' Counterattack: Is AI a Threat or an Enhancement Tool? Huang explicitly refuted market concerns during an event on Wednesday. "There is a view that the software industry is in decline and will be replaced by AI," he said, "this is the most illogical thing in the world." The influential tech leader believes that AI will use and enhance existing software tools rather than completely reshape them. Rene Haas, CEO of chip design company Arm Holdings, echoed this sentiment this week. He stated during an earnings call that enterprise AI deployment is still in its early stages and has not yet produced large-scale transformative impacts. According to the Financial Times, Haas described the recent market panic as "micro-hysteria." On Thursday, Anthropic launched what it calls an improved AI model, just days after its latest Claude tool triggered investor panic. Analyst Divergence: Doomsday Scenario or Profit Pressure? Wedbush Securities echoed Huang's viewpoint in a research report on Wednesday, stating that while AI poses headwinds for software providers, the sell-off reflects "a doomsday scenario for the industry, which is far from reality." The firm noted, "Enterprises will not completely overturn hundreds of billions of dollars in prior software infrastructure investments to migrate to companies like Anthropic and OpenAI." Wedbush Securities stated that large enterprises have spent decades accumulating trillions of data points, which are now deeply embedded in their software infrastructure. However, other analysts foresee more enduring pressure. Consulting firm Constellation Research stated on Wednesday that the sell-off reflects concerns that AI could compress profits and limit software companies' pricing power, rather than signaling the industry's demise Rolf Bulk, a technology stock analyst at Futurum Group, told CNBC: "SaaS is likely to be eroded by AI-driven workflows, which will affect the valuation multiples in the industry." Who Can Survive in the AI Era? Despite concerns, Bulk believes that some software providers—especially those running mission-critical enterprise workloads, such as Oracle and ServiceNow—still possess enduring 'profit rights.' He added that the depth of these companies' data and their entrenched position in customer workflows make them more likely to coexist with AI rather than be completely replaced. Market data and research firm AlphaSense is betting on this strategy, as the company extensively uses AI tools in its products. Chris Ackerson, Senior Vice President of Products at AlphaSense, stated in a comment to CNBC: "The future belongs to those providers who combine advanced AI with trusted content, explainability, and deep domain expertise." Concerns in the software industry predate the recent sell-off. As of Wednesday, hedge funds have shorted about $24 billion in software stocks this year. Short sellers borrow stocks and sell them with the aim of buying them back later at a lower price to profit. This week's sell-off indicates that investors are reassessing which software companies can coexist with AI in the long term, while there remains a profound divide in the market regarding the answer to this question