Investors are feeling jittery about software stocks, and it’s been going on for a while. Fears about artificial intelligence (AI) disrupting the industry are making many want to step back. This week, several big names like Salesforce, Intuit, and Autodesk are set to announce their earnings, but most believe this will do little to calm concerns.
Jack Janasiewicz, a strategist from Natixis Investment Managers, summed it up well: “Everyone just wants to hit the sell button.” The mood is negative, and companies are seen as “guilty until proven innocent.” Recent reports highlight potential risks from AI, pushing many investors to clear out their holdings.
On Monday, software stocks took a hit, leading to a drop in the S&P 500. The iShares Expanded Tech-Software Sector ETF (IGV) fell nearly 5% in a day, with a year-to-date decline of 27%. That puts it on track for the worst quarter since 2008. Options traders are also betting on further declines.
The overall harsh sentiment is evident. Salesforce, for example, has sunk 30% this year, while Intuit has lost 46%. In comparison, the S&P 500 index is nearly flat for the year.
Much of the fear stems from new AI tools that allow users to write their software. If anyone can create apps easily, the big software companies may lose their edge. For instance, Anthropic introduced AI tools aimed at automating processes across various fields.
However, not everything is as grim as it seems. Many of the software companies reporting earnings have actually outperformed expectations. A recent study showed that 87% of the software firms in the S&P 500 exceeded profit estimates in this earnings season. Generally, about 75% of S&P 500 companies have also surpassed their earnings expectations, hinting at resilience amid the uncertainty.
Bank of America recently noted that current market conditions have made software stocks “the new value sector.” The S&P 500 software index is trading at its lowest valuation in over three years.
Salesforce is expected to show about 12% revenue growth and a slight increase in adjusted earnings when it reports its earnings. Other companies like Workday are also anticipated to post decent growth, even if their share prices are low.
That said, experts warn about the unpredictability of AI’s impact on the software industry. Sameer Samana from Wells Fargo points out the overall uncertainty makes long-term forecasting quite difficult. “The level of uncertainty is so high,” he said, “it’s hard to say software is cheap.”
Even good earnings reports may only delay the inevitable questioning of the software sector’s future. Many believe that the real disruptions from AI are still on the horizon.
In broader tech news, IBM had a tough day recently when Anthropic announced new tools that could modernize older programming languages. Shares plummeted over 13% in one day, marking the worst drop in 25 years.
The ongoing discussions around AI’s potential show that it’s a pressing issue. Alap Shah from Citrini Research has even called for an AI tax to offset job losses from automation. With many businesses holding high levels of debt, rising borrowing costs due to these fears could pose additional challenges.
As the sector grapples with these challenges, investor sentiment will likely remain cautious.
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Bloomberg, Salesforce, Intuit Inc., software companies, Snowflake Inc., Anthropic, Autodesk Inc, Jack Janasiewicz, artificial intelligence, Workday, net earnings
