Investors Are Dumping Software Stocks and Earnings Won’t Stop It

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Investors Are Dumping Software Stocks and Earnings Won’t Stop It

Bloomberg

(Bloomberg) — Investors have been ditching software stocks for months on fears of disruption from artificial intelligence, and upcoming earnings from the group aren’t expected to settle any nerves.

A number of software companies report earnings this week, including Workday Inc., Salesforce Inc., Intuit Inc., Autodesk Inc. and Snowflake Inc. But worries about AI’s relentless drag on growth are so prevalent there may be little management teams can say or do to reverse it, at least for now.

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“Everyone wants to just hit the sell button and get out,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, which has $1.4 trillion in assets under management. “These companies are guilty until proven innocent.”

The pessimism was on display Monday as investors again unloaded software stocks after Citrini Research published a report laying out the potential risks posed by AI. The software and services sector was among the biggest decliners in the S&P 500 Index. The iShares Expanded Tech-Software Sector exchange-traded fund, better known by its ticker IGV, tumbled 4.8% on Monday. The fund rose 0.8% on Tuesday, bringing its drop since the start of the year to 27%, still on pace for its worst quarter since 2008. And traders in the options market are betting on further pain ahead.

The deteriorating sentiment surrounding software means there’s “a real bias toward additional downside,” Janasiewicz said. Of the companies reporting this week, Salesforce is down 30% to start 2026, Intuit has fallen 46%, Autodesk has shed 25%, Snowflake has slumped 28% and Workday has lost 39%. The S&P 500, on the other hand, is basically flat for the year.

Much of the fear is centered around new AI tools from companies like Anthropic, OpenAI and Alphabet Inc. that enable users to “vibe code,” or use AI to write software code. If anyone can create their own applications, it would diminish demand for products from the big software makers.

On Tuesday, Anthropic unveiled new AI tools designed to automate work in fields including human resources, investment banking and design.

While the risk is real, it isn’t showing up in the fundamentals, leading some Wall Street pros to view the slump as overdone. Of the 15 software companies in the S&P 500 have that have reported results this earnings season, 87% have beaten expectations for profits and 67% have topped anticipated revenue, according to data compiled by Bloomberg. Roughly 75% of companies in the S&P 500 have exceeded their earnings estimates.

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The divergence between results and stock market performance has made software “the new value sector,” Bank of America strategists led by Savita Subramanian declared in a Feb. 20 note to clients. They have a point, as the S&P 500 software and services index is trading for less than 21 times earnings over the next 12 months, its lowest level in more than three years and far below its five-year average of 29.

Salesforce, which reports results Wednesday, is expected to post revenue growth of about 12% and a roughly 10% rise in adjusted earnings from a year ago (net earnings are seen sliding 15%.) Consensus estimates for both net earnings and revenue have largely held up for 2026 and 2027. As a result, Salesforce shares are the cheapest they’ve ever been at about 13 times estimated earnings.

Workday, which reports Tuesday, is expected to show double-digit revenue growth while net earnings more than double. The stock is also trading at a record-low multiple, although analysts have started to reduce their estimates for net earnings.

Of course, there’s no telling how far AI’s impact on the software industry will be felt. The disruption may be limited to financials or it could reach deep into the business. That uncertainty makes forecasting years out a bit of a moving target, which is new for companies that historically generate durable and consistent growth. While expectations for 2026 software earnings in 2026 are improving, 2027 estimates have shrunk since December, according to Bloomberg Intelligence data.

“The level of uncertainty is so high that I’m not sure you can make peace with estimates past 2026, which means it’s hard to say that software as a whole is cheap, even if some names will ultimately be winners,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.

Wall Street is likely to remain skeptical of the sector regardless of what the latest results show, Samana said. This is especially true for companies like Salesforce that have long underperformed the market. Its stock is down 24% over the past five years, while the S&P 500 is up 76%.

“The company didn’t exactly have it together coming into the distribution of AI, and disruption is only accelerating,” he said. “Not only would you need a remarkable announcement to change sentiment, but then they’d have to continue proving they can thrive over the coming months.”

For many others, he added, positive results or forecasts will only postpone the coming AI reckoning.

“If we see positive results, it will be a sigh of relief that AI is a 2030 story, not a 2027 story,” Samana said. “Ultimately the direction is in the path of huge disruption, and not everyone is going to make it.”

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International Business Machines Corp. shares had their worst day in more than 25 years on Monday, after AI startup Anthropic said its Claude Code tool can help modernize Cobol, a dated programming language that’s run on IBM computers. The stock plunged 13% in its biggest single-day percentage loss since October 2000. With the decline, IBM shares have fallen 27% in February, on track for their biggest one-month slide since at least 1968, according to data compiled by Bloomberg.