For years, software companies have been the favored darlings of Wall Street investment institutions like Goldman Sachs and Morgan Stanley. High profit margins, long-term low capital requirements, and sustained broad performance growth runways prompted venture capitalist Marc Andreessen to declare in 2011 that "software companies are eating the world," driving broadly defined software company stocks across multiple business sectors into long-term bull market trajectories. High-quality fundamental software giants like Microsoft, Google, Oracle, and Salesforce have attracted global capital in droves.

About thirteen years later, artificial intelligence has sparked similar investment fervor in software stocks, with some Wall Street investment institutions preparing to make a considerable portion of the software industry a top dish at the "AI feast." Since 2024, as global tech stock investment waves have simultaneously covered both AI computing infrastructure and AI application software, this has continuously provided significant valuation support for AI application companies like Applovin, Trade Desk, Duolingo, and Palantir Technologies Inc.

Specifically, killer generative AI applications covering B2B or B2C industries across all sectors, as well as "AI agents" that could dramatically boost human society's productivity, are likely to experience explosive growth. This explains why global capital has massively flowed toward core software stocks since 2024.

Companies' urgent need to improve efficiency and reduce operational costs has recently driven the widespread adoption of two core categories of AI application software: generative AI applications and AI agents. Particularly AI agents represented by OpenAI Deep Research and Manus can automate repetitive tasks, perform big data analysis and summarization based on incredibly powerful AI large models, provide real-time monitoring insights and reports, and make appropriate decisions in extremely short timeframes for complex situations, thereby enhancing corporate operational efficiency. Similar efficiency-boosting logic applies to personal learning and work productivity. AI agents can also efficiently participate in all stages of large-scale projects across various global fields from blueprint planning to implementation, significantly accelerating project progress.

Since 2024, benefiting from accelerated expansion trends in market demand for artificial intelligence application software, advertising marketing service provider APPlovin focusing on "AI + digital advertising" and "AI + data analysis" leader Palantir Technologies Inc. have both announced exceptionally strong performance data and future performance outlooks this year. This indicates that not only is demand for AI computing infrastructure represented by NVIDIA AI GPUs incredibly strong, but demand for AI software applications, especially enterprise-level AI application software that can comprehensively improve operational efficiency, is equally robust and accelerating penetration across all industries.

Facebook and Instagram parent company Meta has already achieved far-beyond-expected strong performance growth driven by the "AI + digital advertising" new advertising delivery engine. Meta has raised its 2025 full-year capital expenditure floor from $64 billion to $66 billion, currently expecting 2025 full-year spending between $66 billion and $72 billion, thoroughly highlighting that this social media giant's advertising business growth speed based on the "AI + digital advertising" model is strong enough to support its aggressive investment in AI infrastructure.

However, since this year, not all software stocks have ridden this unprecedented AI boom to achieve "super bull market performance" like Facebook parent Meta, Palantir Technologies Inc., and APPlovin. The so-called "artificial intelligence narrative" has not been a major positive catalyst for some software stocks' performance fundamentals and valuations, but rather a bear market catalyst for these long-term popular software stocks. These software companies suffering massive market sell-offs leading to devastating stock price damage basically all share two labels: under the AI wave, their software products face "premium collapse" and "legacy technology" anxiety.

**AI Is Not Spring Breeze for All Software Stocks**

Salesforce Inc., Adobe Inc., and ServiceNow Inc. are among the worst-performing tech companies in the S&P 500 benchmark index this year, falling at least 16% and losing a combined approximately $160 billion in market value. According to EPFR statistics, after only one net outflow occurrence in the previous consecutive 18 months, investors withdrew funds heavily from the US stock market's software and services industry for two consecutive months ending in June.

Morgan Stanley's basket of Software-as-a-Service (SaaS) company stocks has declined over 6% year-to-date, while the tech-heavy Nasdaq 100 index has risen about 12%. The institution hasn't disclosed specific constituent stocks of this basket, but Morgan Stanley stated that Asana Inc., HubSpot Inc., Bill Holdings Inc., and Vertex Inc. are among the largest declining SaaS software stocks, all falling at least 29%.

Although artificial intelligence threatens various traditional industries long assisted by SaaS in education, talent services, financial management, and other areas, investors see AI large models as a more immediate threat to software companies that write code for digitalized services like customer relationship management and back-office functions.

"Technology obsolescence may arrive unexpectedly," said Robert Ruggirello, Chief Investment Officer at Brave Eagle Wealth Management. "People have good reason to become cautious."

While this anxiety pressures stock prices, it doesn't mean investors have completely lost faith in software as a long-term bull market sector. After all, technology companies like Microsoft, Oracle Corp, and Palantir Technologies Inc. that have achieved "super bull market performance" since 2023 are all software-type tech giants and among this year's major contributors to S&P 500 gains and best performers.

What distinguishes these soaring software companies from underperforming ones like Salesforce and Adobe relative to the S&P 500 is that the market believes they can "take initiative" in artificial intelligence strategy, rather than "firmly defending original positions" like Salesforce and Adobe instead of pivoting to AI as core business growth—after all, tech giants are investing hundreds of billions of dollars developing new AI large model-based software product lines and massively building or expanding AI computing infrastructure.

As artificial intelligence investment enhances advertising targeting precision and user engagement, Facebook parent Meta Platforms Inc.'s revenue growth is accelerating. Palantir's "AI + data analysis" software products are expected to drive a substantial 45% increase in this year's sales. Cybersecurity companies like CrowdStrike Holdings Inc. also show strong stock performance as investors bet that artificial intelligence cannot easily replace such cybersecurity products, and AI-enhanced cybersecurity systems are expected to undergo significant upgrades.

**Software Companies Face "Life-or-Death Choice" Under Premium Collapse and "Legacy Technology" Anxiety**

However, for many ordinary software companies, the threat is too real: artificial intelligence may disrupt their business segments' value proposition—providing productivity-enhancing digital tools to customers at premium prices. If cost-sensitive customers like banks or retailers can obtain nearly identical AI large model-based software services at lower prices from AI application leaders like OpenAI or Anthropic, entire business plans could be destroyed.

Investors still cannot determine whether artificial intelligence can replace work management software dominated by companies like Asana, but first-quarter customer addition slowdown was enough to trigger alarms, causing stock prices to plummet. HubSpot might also adapt to artificial intelligence, but investors worry its CRM customer management tools may face more intense AI-related competitive pressure. Monday.com faces similar situations. The company's workflow centralization software doesn't face "complete obsolescence" risk, but investors worry AI application software or AI agents will weaken its performance growth. Disappointing revenue guidance on August 11 triggered massive selling, slashing its stock price by 30% that day.

**2025 Software Industry Laggards**

"Any company sticking to old technology will either see fundamental damage or be forced to transform toward AI applications. Unless transformation succeeds, you'll see this massive selling pressure in stock prices," said Mark Bronzo, Chief Investment Strategist at Rye Consulting Group.

Currently, investors aren't broadly investing in nearly all software companies like in 2024, but are selling stocks of software companies lacking convincing AI strategies or obvious defensive measures against this epochal significant technology.

"Maybe in 2023 or 2024, people would buy back high-quality software companies like Salesforce when their valuations became relatively cheap historically," Bronzo said. "Now, we might not see this mentality anymore."

This market value damage isn't limited to US software companies. Europe's largest company SAP SE and software peers like Sage Group Plc and Dassault Systèmes SE also fell sharply following Monday.com's warning.

With OpenAI's ChatGPT reaching approximately 700 million weekly active users, Ruggirello compares software companies to "an energy company waking up to find itself competing with a company 'equivalent to ExxonMobil's scale.'"

This concern reflects in software sector valuation anxiety. Due to expected rapid sales growth and Wall Street's favored subscription model (bringing predictable revenue streams), this sector's valuations have significantly exceeded the broader US market—the S&P 500 index—for years. However, Morgan Stanley's compiled software stock basket fell this month to merely 23x expected price-to-earnings ratio—only half the past decade's average valuation level and the lowest since Bloomberg began data compilation in 2014. The Nasdaq 100 index currently trades at a forward P/E slightly below 27x.

Strategists from UBS suggest that severe declines in certain corners of the software sector may present significant investment opportunities. They recommended earlier this month that investors focus on internet and software companies lagging in stock price gains during this AI boom.

"Although AI-related revenue growth hasn't yet matched industry aggressive investments, significant improvements in AI monetization trends and encouraging AI adoption and penetration trends," wrote UBS strategists led by Americas Chief Investment Officer and Global Equity Head Ulrike Hoffmann-Burchardi.

However, global investors' overall cautious attitude toward software stocks cannot be ignored currently. In the twenty years before the 2021 market peak, no industry in the S&P 500 index saw weight increases as large as software and services—rising from less than 6% to nearly 14.5% (even after reclassifying stocks like Google, Facebook, and Amazon to other sectors in 2018). However, this group's weight in the market-cap-weighted S&P 500 index is now about 12%, having been comprehensively surpassed by semiconductor giants benefiting from surging AI computing hardware demand (led by NVIDIA, Broadcom, and Taiwan Semiconductor).

Notably, without Microsoft, Oracle, and Palantir significantly outperforming the S&P 500, the software group's weight might be much lower.

"The market's view is that risks have significantly elevated, and we won't get clarity in the short term," said Ruggirello from Brave Eagle. "What we can currently confirm is that a few software companies like Meta and Microsoft continue winning and keep winning major AI battles—but not all software companies are like this."