AI-Driven Software Sell-Off: Opportunity or Overreaction?
Wall Street is grappling with a new reality: the rapid advancement of artificial intelligence and its potential to disrupt established software business models. Recent weeks have seen a significant sell-off in software stocks, fueled by concerns that AI-powered automation could render traditional “software as a service” (SaaS) offerings obsolete. The iShares Expanded Tech-Software Sector ETF (IGV) has fallen over 20% in 2026, with an 8% drop in February alone.
Anthropic’s Impact and the Initial Panic
The catalyst for the recent turmoil was the release of new tools by AI startup Anthropic, specifically within its Claude Cowork agent. These tools automate tasks in legal, finance, and product marketing, sparking fears about the future of jobs and the companies that rely on them. This initial wave of anxiety spread beyond software, impacting sectors like office real estate and wealth management.
A Potential Rebound? Citi’s Contrarian View
Despite the widespread pessimism, some analysts see opportunity amidst the chaos. Citi strategists have screened the Russell 3000, identifying software and services stocks with at least a $2 billion market cap that have experienced a 10% or greater decline in the past month. Crucially, they are focusing on companies where earnings expectations for 2025, 2026, and 2027 have actually been revised higher.
“We want to focus on names that have corrected, reducing implicit terminal multiples, but have actually seen earnings expectations improve,” explained Drew Pettit, Citi’s U.S. Equity strategist. The strategy centers on identifying companies that can still deliver near-term results, even as their medium-term valuations have been adjusted.
Stocks to Watch: Microsoft and Palantir
Citi’s analysis highlights several potentially undervalued stocks. Microsoft, despite being the worst-performing “Magnificent Seven” stock this year, has garnered attention from analysts at Goldman Sachs and Wedbush, who recommend buying the dip. Palantir, down nearly 37% from its 52-week high, also appears on the list, despite recently exceeding Wall Street’s earnings expectations and providing optimistic revenue guidance.
Did you understand? The software sector shed $611 billion in market value last week alone, according to Bloomberg data.
The Importance of Fundamentals
Pettit emphasizes a return to fundamental analysis, focusing on earnings momentum in growth areas like software. He believes that positive revisions to earnings estimates will be a key catalyst for attracting investors back to the sector. This suggests that companies demonstrating continued innovation and strong financial performance are best positioned to weather the AI storm.
Navigating the Volatile Bull Market
The current market environment is characterized by high valuations and increased volatility. In such conditions, a focus on earnings momentum is particularly crucial. Investors are seeking companies that can not only survive the AI disruption but also thrive in the new landscape.
FAQ
Q: What caused the recent drop in software stock prices?
A: Concerns about the impact of artificial intelligence on traditional software business models, particularly following the release of new automation tools by Anthropic.
Q: Is now a good time to buy software stocks?
A: Some analysts, like those at Citi, believe that certain software stocks are undervalued and present a buying opportunity, particularly those with improving earnings expectations.
Q: Which companies are being highlighted as potential buys?
A: Microsoft and Palantir are among the companies identified by analysts as potentially undervalued and poised for a rebound.
Q: What is the IGV ETF?
A: The iShares Expanded Tech-Software Sector ETF (IGV) tracks the performance of companies in the software sector.
Pro Tip: Don’t rely solely on technical indicators. Focus on companies with strong fundamentals and a clear strategy for adapting to the changing AI landscape.
Stay informed about the evolving dynamics of the software industry and the impact of AI. Explore further insights on market trends and investment strategies to make informed decisions.
