**Summary:** Investors are increasingly concerned that artificial intelligence (AI) and automation tools could disrupt traditional software licensing and workflows, leading to a significant downturn in the software industry. This sentiment was evident as the iShares Expanded Tech-Software Sector ETF (IGV) fell approximately 21% from its recent peak, driven by fears that AI may permanently alter revenue potential for major software firms. Notably, bellwether companies like ServiceNow and Microsoft reported solid earnings, yet their stock prices plummeted, highlighting the growing skepticism surrounding the sector’s future.

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### The AI Disruption: A Storm Brewing in the Software Industry

In recent months, the software industry has faced a seismic shift in investor sentiment, primarily fueled by the rapid advancement of artificial intelligence (AI) and automation technologies. Once viewed as a bastion of stability and growth, the software sector is now confronting intense scrutiny as investors grapple with the potential implications of AI on traditional business models. The iShares Expanded Tech-Software Sector ETF (IGV) has plunged about 21% from its recent high, placing the software sector firmly in bear-market territory. This downturn comes despite solid earnings from prominent players like ServiceNow and Microsoft, raising questions about the industry’s future.

#### A Closer Look at the Numbers

On a particularly troubling Thursday for the software sector, IGV dropped nearly 5% in morning trading, marking its steepest one-day decline since April of the previous year, when tariffs rattled the markets. Month-to-date, the ETF is down almost 14%, on track for its worst month since October 2008, a time when the financial crisis sent shockwaves through global markets. The stark contrast between solid earnings reports and plunging stock prices underscores the growing fears surrounding the viability of traditional software licenses and workflows in an AI-driven landscape.

For instance, ServiceNow, a leader in enterprise software solutions, announced fourth-quarter earnings that exceeded Wall Street’s expectations, coupled with an optimistic guidance for future growth. Yet, the market reacted by sending the company’s shares down more than 12%. Analysts at Morgan Stanley commented on this paradox, noting that while the earnings were “good,” they were “not good enough” to sway investor sentiment in a climate filled with skepticism towards incumbent application vendors.

#### The AI Threat: A Game Changer for Software Firms?

The crux of the issue lies in the apprehension that AI and automation tools could significantly erode the demand for traditional software products. As companies like Anthropic quickly roll out advanced AI models capable of performing complex tasks—including coding and data analysis—traditional software firms are left reeling. Anthropic’s Claude Opus 4.5, for example, was launched with remarkable speed and efficiency, showcasing capabilities that could potentially replace or diminish the need for conventional software solutions.

Ben Reitzes, the head of technology research at Melius Research, articulated the industry’s growing anxiety on CNBC’s “Squawk on the Street.” He stressed that the rapid pace of AI development is creating a narrative that could undermine confidence in established players like Microsoft. “It is a little embarrassing that in 10 days, Anthropic was able to invent, co-work, put it out, and everybody … could look at it and go, ‘Wow, why isn’t Microsoft doing that?’” Reitzes said. This sentiment reflects a broader concern among investors that patience may run thin for companies unable to keep pace with the transformative power of AI.

#### The Impact on Software Valuations

Valuations in the software sector, once justified by consistent subscription growth, are being reevaluated as investors reassess long-term revenue potential in light of AI advancements. The fear is that AI could fundamentally alter the market dynamics, reducing the reliance on traditional software licenses. As firms pivot towards more automated solutions, the recurring revenue models that have historically bolstered software companies’ valuations may come under pressure.

For instance, Microsoft recently reported a slowdown in cloud growth during its fiscal second quarter, leading to a nearly 10% drop in its stock price—the steepest one-day decline since March 2020. The company’s guidance for operating margins fell short of expectations, raising alarms among investors about the sustainability of its growth trajectory in an increasingly competitive landscape.

Similarly, SAP, the German software giant, saw its stock slide by 14% after announcing weaker-than-expected growth in its cloud contract backlog. Analysts pointed out that SAP’s current cloud backlog of €21.1 billion (approximately $25.3 billion) grew by only 16%, falling short of the anticipated 26% growth. UBS analysts expressed disappointment, highlighting how quickly investor confidence can wane in the face of emerging competition.

#### Counterarguments: The Role of Software in an AI World

Amid these concerns, ServiceNow’s CEO Bill McDermott attempted to quell investor fears during the company’s earnings call. He argued that the notion of AI displacing software vendors is misguided. McDermott posited that the real value of AI will be realized when it is embedded into workflows where critical business decisions are made. “The real payoff comes when trillions of tokens move beyond pilots to be embedded directly into the workflows where business decisions are made,” he asserted, positioning ServiceNow as a crucial player in this transition.

McDermott emphasized that AI systems are probabilistic in nature, meaning that businesses will still require structured workflow software to ensure consistent outcomes. This perspective underscores the idea that rather than serving as a replacement, AI could enhance the utility of traditional software solutions by making them more efficient and effective.

#### Lessons from the Past: Navigating Market Cycles

The current turmoil in the software sector is reminiscent of previous market cycles, where investor sentiment rapidly shifted from euphoria to despair. The dot-com bubble of the late 1990s serves as a cautionary tale, illustrating how quickly optimism can turn into skepticism when companies fail to deliver on lofty expectations. In today’s landscape, the fear of AI disruption has created a similar environment, where even solid earnings reports are met with skepticism.

As the software industry navigates this period of uncertainty, it is essential for companies to articulate a clear vision of how they plan to adapt to the evolving technological landscape. Emphasizing innovation and demonstrating a commitment to integrating AI into their offerings will be critical for regaining investor confidence.

#### Implications for Investors and the Broader Market

For investors, the current environment presents both challenges and opportunities. While the immediate outlook for traditional software firms may appear bleak, there are potential avenues for growth within the AI space. Companies that successfully leverage AI to enhance their product offerings could emerge as leaders in the next wave of technological advancement.

Moreover, the broader market implications of this shift cannot be overlooked. As AI continues to permeate various industries, the demand for skilled professionals who can navigate this new landscape will increase. Educational institutions and training programs will need to adapt to prepare the next generation of workers for the AI-driven economy.

#### Conclusion: A Fork in the Road

The software industry stands at a crossroads, grappling with the profound implications of AI and automation on traditional business models. While investor skepticism has deepened in recent months, the potential for innovation and growth remains. Companies that can effectively integrate AI into their workflows and demonstrate adaptability will be well-positioned to thrive in this new landscape.

As the market continues to react to the unfolding narrative surrounding AI, both investors and industry leaders must remain vigilant, continuously assessing the evolving dynamics at play. The road ahead may be fraught with uncertainty, but it also holds the promise of transformation and opportunity for those willing to embrace change.

**Original source:** https://www.cnbc.com/2026/01/29/software-stocks-enter-bear-market-on-ai-disruption-fear-with-servicenow-plunging-11percent-thursday.html