US software stocks drop on AI disruption worries, analysts say

US software stocks experienced a drop recently amid concerns over AI disruptions, prompting some strategists to view current valuations as buying opportunities.

JP Morgan analysts noted that the market appears to be pricing in worst-case AI scenarios unlikely to occur within the next three to six months.

They suggested that the recent selloff, which saw the S&P 500 software and services index fall up to 17% before rebounding about 7%, may have overreacted given the solid fundamentals of higher-quality software companies.

JP Morgan recommended increasing exposure to stocks such as Microsoft, Palo Alto Networks, ServiceNow, CrowdStrike, and Datadog, which were among the most affected.

Morgan Stanley also highlighted potential in the sector, citing strong revenue outlooks, positive earnings revisions, and benefits from a weaker dollar.

Despite the concerns, retail investors continued to buy software and tech stocks after last week’s decline.

🔗 Source: Reuters

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An Anthropic release helped spark the software selloff

The market drop followed Anthropic’s January 30 release of open-source plugins for its AI workplace suite Claude Cowork 1.
The plugins can run enterprise work on their own, including contract review and financial analysis, raising worries that some business software subscriptions may become less essential 1.
Selling picked up fast, and the iShares Expanded Tech-Software Sector ETF slid about 22% from its recent high, putting it in bear-market territory 2.
Thomson Reuters took a record one-day stock fall earlier that week after investors questioned whether a new Anthropic Claude plug-in could disrupt its legal business 3.

The pullback centers on worries about the SaaS per-seat model, including IT services

Analysts have labeled the concern “SaaSpocalypse,” arguing that AI agents could cut demand for per-user software licenses and squeeze parts of the Software-as-a-Service (SaaS) model 1.
Some corporate executives say AI is already reshaping hiring and staffing plans, which could reach beyond share prices 1.
Salesforce CEO Marc Benioff has said the company will not hire more engineers or lawyers because of AI 1.
IT services providers also face pressure, with India’s headcount-based outsourcing model described as heading for an “existential repricing,” while the Nifty IT index fell 5.87%, its steepest drop since March 2020 1.