AI Anxiety Sweeps Wall Street Amidst Emerging Stock Market Landscape

AI Innovations Trigger Market Turbulence

Photo by Krisztian Bocsi/Bloomberg

In recent months, investor unease has grown over the sweeping changes artificial intelligence could bring to the global economy. That anxiety erupted in the stock market last week.

The catalyst was Anthropic, an AI startup, which introduced a suite of automation tools targeting sectors such as legal, data analysis, and financial research. The news stoked fears that these advancements might threaten the survival of many established businesses. As a result, investors rapidly sold off shares across a wide range of companies, including Expedia Group Inc., Salesforce Inc., and London Stock Exchange Group Plc.

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By the end of the week, bargain hunters helped the iShares Expanded Tech-Software Sector ETF (IGV) recover from a sharp 12% drop over four days. Yet, for many on Wall Street, the message was unmistakable: this kind of volatility is the new normal.

“New developments are emerging almost every day,” said Daniel Newman, CEO of the Futurum Group. “The number of companies that could be affected by AI is expanding rapidly.”

Major Losses Despite Late-Week Recovery

Even with a partial rebound, the week left deep scars. Thomson Reuters Corp.’s Canadian shares suffered a record 20% weekly plunge. Morningstar Inc., a financial research firm, endured its worst week since 2009. Software companies like HubSpot Inc., Atlassian Corp., and Zscaler Inc. each saw their stock prices fall by more than 16%.

Altogether, 164 companies in software, financial services, and asset management lost a combined $611 billion in market capitalization last week. (Bloomberg LP, which owns Bloomberg News, is a competitor to LSEG, Thomson Reuters, and Morningstar in the financial data and news sector. Bloomberg Law also offers legal research software.)

AI’s Disruptive Force Shifts Market Focus

Since OpenAI’s ChatGPT launched in late 2022, the disruptive potential of AI has been widely discussed. Until recently, however, investors mainly focused on the companies set to benefit from the AI boom. Massive investments in computing infrastructure fueled a surge in shares of chipmakers, networking companies, energy suppliers, and materials firms.

This approach proved lucrative: an index tracking semiconductor stocks has more than tripled since the end of 2022, outpacing IGV’s 61% gain and the S&P 500’s 81% rise.

Rapid Innovation Heightens Uncertainty

While the “pick-and-shovel” strategy—investing in the suppliers of AI infrastructure—remains popular, the pace of new product launches by startups like Anthropic and OpenAI, as well as Google, is making the threat of disruption feel more immediate. In the past month alone, Google unsettled the gaming industry with a tool that builds immersive digital worlds from simple prompts, and Anthropic’s new work assistant, based on its Claude coding platform, triggered a selloff in software stocks.

These developments compounded worries already heightened by disappointing earnings from major software companies. Microsoft Corp. lost $357 billion in market value in a single day after reporting slower growth in its cloud business, raising concerns about the costs of AI investments. ServiceNow Inc. dropped 10%, and SAP SE fell 15% after similarly weak results.

“The industry leaders let us down,” said Jackson Ader, software analyst at KeyBanc. “If companies can’t deliver strong results and guidance, it’s hard to have confidence in the sector as a whole.”

Traditional Software Firms Under Pressure

Although many newer companies were hit last week, traditional software makers have suffered the most, with declines stretching back to last year. Salesforce, which owns Slack, is down 48% from its December 2024 peak. ServiceNow, a provider of HR and IT software, has dropped 57% since reaching its high in January 2025.

“Some businesses will adapt to AI and thrive, but others may face lasting disruption,” said Jim Awad, senior managing director at Clearstead Advisors. “At this point, it’s difficult to tell which companies will succeed.”

Investors Flee Software Sector

These fears have led to a mass exodus from software stocks. According to Goldman Sachs’ prime brokerage, software has been the most heavily sold sector so far this year. Hedge funds’ net exposure to software has fallen to less than 3% as of February 3, down from 18% at its 2023 peak.

Despite the selloff, there’s little concrete evidence of a fundamental decline. In fact, Wall Street analysts are increasingly optimistic about future profits. Earnings for software and services companies in the S&P 500 are now expected to grow 19% in 2026, up from earlier forecasts of 16%, according to Bloomberg Intelligence.

Technical Indicators and Valuations

“Everyone seems to think operating metrics are about to collapse, but I’m not convinced,” said Michael Mullaney, director of global market research at Boston Partners. “It’s possible that profits and margins will remain solid, even amid disruption. If I managed growth portfolios, I’d be buying on these dips.”

The relentless selling has pushed software stocks into deeply oversold territory. The 14-day relative strength index for the iShares ETF dropped to 15 on Thursday—its lowest in nearly 15 years—and remains below 30, a level typically seen as oversold.

Valuations have also become more attractive. A group of software stocks tracked by Goldman Sachs now trades at a record low of 21 times projected earnings, down from over 100 in late 2021. Salesforce is valued at 14 times expected profits for the next year, compared to a decade-long average of 46.

“We keep testing valuation lows and then breaking through them,” said KeyBanc’s Ader. “Investors are hesitant to call these stocks cheap, since historical multiples would have suggested buying months ago, but that strategy hasn’t worked out.”

Reporting assistance by Natalia Kniazhevich.

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