AI fears trigger extended selloff in US software stocks

Shares of US software and data services companies extended a sharp downturn as investors reassessed valuations amid rapid advances in artificial intelligence, sparking a broad rotation away from technology and wiping out nearly $1 trillion in market value.

Shares of U.S. software and data services firms fell for a seventh consecutive session, deepening one of the sector’s steepest selloffs in recent years as concerns mounted that artificial intelligence could disrupt established business models.

The S&P 500 software and services index slid 4.6% on Thursday, taking its decline since late January to roughly $1 trillion in lost market capitalisation. The extended downturn has fuelled fears that the industry may be entering a prolonged period of repricing after years of technology-led gains.

Several large-cap names bore the brunt of the selling pressure. ServiceNow dropped sharply, while Salesforce and Microsoft also closed significantly lower, reflecting a broad-based retreat from software stocks rather than company-specific issues.

AI uncertainty weighs on sentiment

Market participants said uncertainty around the long-term impact of AI on pricing power, margins and competitive dynamics has unsettled investors. While many software firms have highlighted productivity gains and new revenue opportunities from AI investments, analysts cautioned that the near-term financial implications remain unclear.

Investor anxiety was further evident in the lack of bargain hunting. Despite steep declines, dip buyers largely stayed on the sidelines, with the software index trading more than 20% below its 200-day moving average — a level not seen since mid-2022.

Strategists noted that such sharp corrections can create selective opportunities, but warned that predicting a near-term bottom remains difficult amid fragile sentiment and rising volatility.

Rotation away from technology

The software rout has coincided with a wider shift out of growth-oriented technology stocks into value-driven sectors such as consumer staples, energy and industrials. Data also showed rising short interest in mid- and large-cap software firms, particularly in cybersecurity and software-as-a-service segments.

Hedge funds have reduced exposure to software stocks in recent weeks, although overall positioning remains net positive, according to market data. The cautious stance reflects growing concerns that AI-driven disruption could challenge traditional revenue models faster than anticipated.

The selloff rippled across related industries, including asset managers with lending exposure to software firms. Global markets showed mixed reactions, with some overseas data and analytics stocks posting gains, while Indian IT exporters also remained under pressure.

Meanwhile, broader market volatility climbed to multi-month highs, underscoring heightened risk aversion as investors reassess technology’s leadership role in global equities.