The slow burn in software stocks is erupting into an all-out bonfire

For software stocks, the past few quarters have required acts of gymnastics to assuage investors.

Yes, of course there is an AI revolution happening that will fundamentally change the technology industry. No, don’t be ridiculous, it will not affect us or our balance sheets — we’re going to be one of the winners here. Sure, you are right that they’ve created code that can write code, but that code certainly can’t code new code that would render our code obsolete. Anyway, have some earnings, go away, we’ll see you in three months.

Well, the party’s over:

This earnings season, investors have decided that AI is enough of a long-term threat to the earnings power of software companies that the past three months or the next 12 are, at best, the calm before the storm. And heaven help management teams that didn’t offer strong results or a positive outlook.

The slow burn in software stocks erupted into an all-out bonfire on Thursday, fueled by traders finding any excuse to sell Microsoft (which suffered its worst sell-off since March 2020) and ServiceNow (down 10%) after both reported robust quarterly results.

The question is no longer if software stocks will come down to Earth, but rather who’s in the impact crater. The follow-through weighed on the likes of Atlassian (down 11%), Workday (down 8%), Salesforce (down 6%), Datadog (down 9%), and Intuit (down 7%).

Put it all together and the iShares Expanded Tech Software ETF had its worst day since the Friday following the Rose Garden reciprocal tariff announcements in April 2025.

The Takeaway

Are there babies being thrown out with the bathwater here? Maybe. Probably, even!

But it likely won’t inspire too much confidence to learn that the last time the S&P 500 Software & Services industry group was down at least 20% over a 63-session stretch while the S&P 500 was positive, as was the case midday on Thursday, happened to be June 12, 2000.