By Lewis Krauskopf and Suzanne McGee
NEW YORK, Feb 5 (Reuters) – Wall Street’s “Software-mageddon” has been snowballing. Now investors are debating whether it is time to warm up to the beaten-down stocks.
The fallout for the software industry, which includes a handful of signature stocks of the recent bull market, reflects growing anxiety over the potential disruption caused by artificial intelligence, as investors increasingly divide the sector into perceived winners and losers. The volatility also comes as investors shed tech holdings for other market areas that have mostly lagged in recent years while investors await quarterly updates during the heart of corporate earnings season that could further shake asset prices.
“The selloff, which arguably started last quarter, is a manifestation of an awakening to the disruptive power of AI…,” said James St. Aubin, chief investment officer at Ocean Park Asset Management, Santa Monica, California. “Perhaps this is an overreaction, but the threat is real and valuations must account for that.”
Shares of beaten-down European professional services companies such as LSEG and RELX were up on Thursday, in a sign the rout was easing. Both are still down by at least 9% this week.
The S&P 500 software and services index has tumbled 13% in just the past week, shedding more than $800 billion in market capitalization in that time, driven by sharp falls in companies including Intuit, ServiceNow and Oracle. Relative to the overall S&P 500, the software group put up its worst three-month performance as of Tuesday since May 2002, during the fallout from the dot-com bubble bursting, according to Evercore ISI equity strategists.
Those steep declines have set off technical signals that could indicate at least a temporary bottom for the group, and some portfolio managers have been doing modest buying of the beaten-up names. Investors, however, hesitated to declare an all-clear sign.
“There is some long-term value in these names and they are getting to a point where I feel they are looking more attractive,” said Jake Seltz, portfolio manager at Allspring Global Investments in Minneapolis, who has been adding “at the margin” to some holdings including ServiceNow and Monday.com in recent months. Seltz said he was waiting for catalysts to buy more aggressively, such as software companies reporting strong AI-related product revenue or more announcements from enterprise customers that they are deploying such software.
TURNING AWAY FROM TECH STOCKS
Fears about the implications from a new tool from Anthropic’s Claude large language model set off the latest bout of volatility, which has been compounded by disappointing earnings reports including from software giant Microsoft.
The S&P 500 software index is down about 25% since its recent peak at the end of October — a period that has seen the S&P 500 little changed. Options traders showed a lack of appetite for scooping up the battered software names.
“This has been Software-mageddon,” said Art Hogan, chief market strategist at B Riley Wealth.
The steep declines for software names also comes during a broader market rotation away from technology names and into value and quality stocks in other sectors, such as consumer staples, energy and industrials, which until recently had been less favored than tech during the bull market that began in October 2022.
“The right reason to sell these expensive companies is that there are other opportunities in things that are better valued and have more room to run, not because you’re panicking about a crash in software and tech companies,” said Jim Masturzo, chief investment officer at Research Affiliates.
LOOKING FOR VALUE AFTER THE FALL
Whether that value is now found in software is the debate facing investors. Among the biggest decliners so far this year are Intuit, ServiceNow, and Salesforce. Microsoft is the worst performer this year among the “Magnificent Seven” megacap stocks. Other sharp declines this week included technology and content company Thomson Reuters, which owns the Westlaw legal database and Reuters news agency.
The software swoon meant the group was looking oversold on a technical basis, suggesting it was close to “at least a near-term bottom,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. His firm has done some modest buying of shares of ServiceNow and Microsoft in recent days.
While not looking to “bet the farm” on software, “I do think it is starting to present value,” Todd said. “I don’t think this wholesale replacement of the existing software infrastructure for the AI solution in these situations is realistic.”
Brad Conger, chief investment officer at Hirtle, Callaghan & Co., said he has begun weighing potential purchases of shares including SAP, Adobe and Intuit that have been hit hard in the selloff. “You could argue that they are due a bounce.”
But he added that he is not yet prepared to become a buyer at present levels as he is not “comfortable that they have reached a level where the worst threat is priced in.”
To some investors, the fallout was similar to the swift declines precipitated last year by the emergence of the low-cost Deepseek AI model, which led to questions about the AI financial ecosystem.
“We are starting to get a better sense of what AI’s capabilities are, the market is doing some repricing, signaling less confidence in future software sales growth in an AI-driven world,” said Rene Reyna, head of thematic and specialty product strategy at Invesco. “Is it overdone? We can’t tell yet. But selling can beget more selling.”
(Reporting by Lewis Krauskopf and Suzanne McGee, additional reporting by Chibuike Oguh, Chuck Mikolajczak, Saqib Iqbal Ahmed and Samuel Indyk; editing by Megan Davies, Diane Craft and Louise Heavens)
Comments