US Software Stocks Slump on Renewed AI Disruption Jitters

The fears never really went away. They just took a brief pause. On Thursday, US software shares tumbled as anxieties over artificial intelligence disrupting the industry returned to the forefront, triggered by a recent update from Anthropic , the AI safety-focused company .

The broader S&P 500 Software and Services Index fell 2.6 percent , extending its year-to-date decline to 25.5 percent . Investors have been dumping software stocks all year on worries that AI tools capable of automating human tasks could pose an existential threat to the sector .

The Anthropic Trigger

Earlier this week, Anthropic launched a powerful new AI model but held off on releasing it widely over concerns that it could expose hidden cybersecurity vulnerabilities. Only a group of around 40 tech heavyweights, including Microsoft and Google , would have access to Anthropic's "Claude Mythos" model .

"If Mythos is that strong and that powerful and it's exposing these vulnerabilities that have been around for years, it just shows one, the weakness of the current software that's out there and two, that AI is still making incredible progress versus legacy software companies," said Michael O'Rourke , chief market strategist at JonesTrading .

The announcement rekindled a debate that had been briefly sidelined by optimism over a US-Iran ceasefire. That truce lifted broader risk appetite on Wednesday, but with the ceasefire looking fragile, the software-specific concerns quickly reasserted themselves .

"We're getting back to being concerned about the prior software-specific concerns stemming from AI and private credit that are coming back to the fore," said Steve Sosnick , chief market analyst at Interactive Brokers .

The Numbers: A Steep Decline

The sell-off was broad and deep.

Zscaler was among the biggest decliners on the S&P 500, dropping 8.8 percent after brokerage BTIG downgraded the stock to "neutral" from "buy," citing concerns over demand and potential competition. The company is now trading at 31.4 times expected earnings over the next 12 months—near the bottom of its historical range compared to a multiple of 55.4 at the beginning of the year .

Cybersecurity firms were hit hard: Cloudflare, Okta, CrowdStrike, and SentinelOne fell between 4.9 percent and 6.5 percent .

Enterprise software developers also slumped: Atlassian dropped 6.8 percent , Workday fell 5.2 percent , Adobe declined 4.1 percent , Salesforce lost 3.7 percent , and Intuit fell 4.3 percent .

In Europe, the anxiety crossed the Atlantic. SAP Global , Capgemini , and Temenos fell between 3 percent and 7 percent .

The AI Question No One Can Answer

The moves underscore how one of Wall Street's favorite trades has turned into a headache. For years, software companies were prized for their recurring revenue, high margins, and predictable growth. AI now threatens to upend that model by automating tasks that previously required expensive software licenses and human intervention.

"Whether AI spells the end of the software business is an open question. Given the unprecedented dynamism and speed of AI, we do not pretend to have the answers," said Michael Clarfeld , portfolio manager at ClearBridge Investments .

The uncertainty is not merely theoretical. Investors are now asking: if an AI can write code, why pay for enterprise software? If an AI can analyze security threats, why subscribe to a cybersecurity platform? The answers will determine which software companies survive and which become obsolete .

The Private Credit Ripple Effect

The anxiety is also creeping into private credit , as investors scrutinize lending to technology companies amid doubts over future growth. Carlyle Group shares dipped 1.5 percent as the company's flagship private-credit interval fund became the latest to be hit by a wave of redemptions .

Private credit has grown rapidly in recent years, filling the gap left by traditional bank lending. But if software companies' growth prospects dim, the loans backing them become riskier. The feedback loop is tightening .

The software industry is at an inflection point. AI is no longer a distant threat; it is here, and it is improving rapidly. The companies that adapt by integrating AI into their products or pivoting to new business models may thrive. Those that fail to adapt may face the same fate as the legacy software firms they once disrupted.

For investors, the calculus has changed. The multiples that once seemed justified by recurring revenue and sticky customers now appear vulnerable. The sell-off may continue until the market gains clarity on which software companies have a future in an AI-driven world.

As O'Rourke put it, the Anthropic announcement revealed not only the power of AI but also "the weakness of the current software that's out there." That is a sobering thought for an industry that has long been a market darling. The question is no longer whether AI will disrupt software. It is how many software companies will survive the disruption .