The long-held belief that software would “eat the world” faced a harsh reality check on Tuesday. A massive selloff, fueled by fears that generative artificial intelligence is rapidly evolving from a tool into a replacement for traditional software, erased approximately $300 billion in market value from the sector.
The downturn was sparked by fresh evidence of AI’s encroaching capabilities. On Tuesday morning, investors reacted sharply to an announcement from Anthropic regarding new legal tools for its “Cowork” assistant. Designed to automate complex legal drafting and research, the update sent shockwaves through companies that rely on proprietary legal databases. Shares of Thomson Reuters, Legalzoom.com, and the London Stock Exchange Group all plummeted by more than 12%.
Broad Market Contagion
What began as a localized reaction in legal tech quickly evolved into a broader referendum on the software industry’s “competitive moat.” By Tuesday afternoon, the decline spread to diverse players across the ecosystem. PayPal, Expedia Group, EPAM Systems, Equifax, and Intuit were among the hardest hit, each seeing double-digit losses.
Art Hogan, chief market strategist at B. Riley Wealth Management, noted the urgency of the shift. “If things are advancing as rapidly as we hear from OpenAI and Anthropic, it’s going to be a problem,” Hogan said. “Investors are starting to go after any of the companies that could be disrupted, which is all kinds of software application names.”
The tech-heavy Nasdaq composite fell 1.4%, while the S&P 500 dropped 0.8%. However, the damage was concentrated; while software-heavy indexes reeled, five of the S&P 500’s 11 sectors managed to close higher, highlighting the specific anxiety surrounding code-based businesses.
The Threat to “Sticky” Revenue
For years, software companies were prized for their “sticky” contracts and recurring revenue. Investors assumed that once a company integrated a specific system of record, the cost and difficulty of switching created a protective barrier. That assumption is now being tested by AI models like Anthropic’s Claude, which has gained notoriety for its ability to navigate desktops and execute coding projects autonomously.
This disruption risk has extended into the private equity and private credit sectors. Firms like Ares Management, KKR, and Blue Owl Capital—which have spent a decade heavily weighting their portfolios with software equity and debt—saw shares drop between 4% and 9%.
Jon Gray, President and COO of Blackstone, addressed the volatility at the WSJ Invest Live event on Tuesday. “I don’t view this as a private credit or liquidity issue,” Gray said. “It’s the change happening in the economy. You could be an incumbent software company that’s the system of record and maybe you face risk from AI disrupters.”
A Peak or a Valley?
The software industry is attempting to defend its ground by arguing that while AI can write code, it cannot easily replicate the trust, security, and specialized data integration that established platforms provide. Nevertheless, the market remains unconvinced. Software and services had already been the worst-performing subsector in the S&P Dow Jones Indices this year prior to Tuesday’s rout.
This latest dip follows a period of skepticism regarding the massive capital expenditures required for AI infrastructure. Last week, Microsoft reported higher-than-expected spending on AI alongside slower cloud growth, leading many to wonder when these investments will yield significant corporate profits.
“The enthusiasm for AI rolls through peaks and valleys,” said Louis Navellier, founder of Navellier & Associates, suggesting that the current selloff may be part of a larger cycle of recalibration.
