Software stocks once a favorite
Software hit hard by AI. For years, software companies have been a favorite of Wall Street investment institutions. High profit margins, low capital requirements, and promising growth prospects have driven a long-term bull market in software companies. Software giants like Microsoft and Google have attracted an influx of global capital.
Software stocks significant declines
Salesforce, Adobe, and ServiceNow are among the worst-performing companies in the S&P 500 this year, with share prices down at least 16% and their combined market capitalization slashed by approximately $160 billion. Other software stocks, such as Asana, Hubspot, and Bill Holdings, are among the worst performers, with their share prices down at least 29%.
It’s happening to software stocks worldwide
The impact isn’t limited to US companies. Following Monday.com’s warning, shares of SAP, Europe’s largest company by market capitalization, and smaller peers like Sage Group and Dassault Systemes also fell.
SaaS no longer enjoy high valuations
Morgan Stanley’s index of software-as-a-service (SaaS) stocks traded at 23 times expected earnings in Aug 2025. This is half its average over the past decade and the lowest level in Bloomberg data going back to 2014. The Nasdaq 100’s forward P/E ratio is just under 27.
AI is a Real Threat to Software Companies
For many other software companies, the threat is very real, as AI has the potential to disrupt the industry’s value proposition: providing customers with productivity-enhancing digital tools and charging premium prices. Investors can’t be sure whether AI will replace all software, but it’s already making technology obsolete without warning.
Semiconductors weight Overtake Software
In the two decades leading up to the 2022 market peak, no industry group in the S&P 500 saw its weighting grow as dramatically as that of software and services, from less than 6% to nearly 15.9%, even after social and digital advertising companies like Google and Meta were reclassified as “other sectors” in 2018.
The software sector’s weight in the market-cap-weighted S&P 500 is now approximately 12% of the benchmark and has been slightly surpassed by semiconductor companies, which have benefited from surging demand for computing hardware. The software sector’s weighting would have been even lower if not for the outperformance of Microsoft, Oracle, and Palantir.
Conclusion
Unless they successfully transition, any company relying on older technologies will suffer or be forced to pivot, and you’ll see this reflected in its stock price. A few software companies, such as Meta and Microsoft, continue to win in the field of AI, but not all software companies can do so.
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