The software and services industry\u2019s recent plunge has ignited fears that the artificial intelligence boom may be reshaping markets in unexpected ways, raising questions about whether a rotation out of technology stocks signals trouble ahead for the AI trade. <\/p>\n
Financial markets, juiced for months with investor \u200denthusiasm about the \u200bartificial intelligence trade, got a rude awakening last week as software stocks around the globe sank on worries that fast-advancing AI tools could upend the industry.<\/p>\n
While a rebound in the broader market helped soothe nerves on Friday, the outlook for U.S. software stocks, at the epicenter of the selloff, remained murky. Despite a 2-per-cent rebound on Friday, options market participants remained on high alert for further pain.<\/p>\n
The selloff, which crossed continents knocking stocks from Europe to Asia, was triggered \u2060by a new legal tool from Anthropic\u2019s Claude large language model that raised existential questions about traditional software business models.<\/p>\n
Investors are questioning whether the earnings-compounding nature of software companies would get disrupted, with strategists noting a broader rotation into value and cyclical-oriented sectors such as consumer staples, energy and industrials.<\/p>\n
Software and services stocks\u2019 underperformance against the S&P 500 has reached near-record proportions, with the sector lagging the benchmark by nearly 24 percentage points over the past three months, nearly the worst \u200csuch gap in data going back three \u200ddecades.<\/p>\n
The downturn marks a stark reversal for the industry group that overall put up outsized gains for much of the post-pandemic era, \u200dwhen investors bet on digital transformation and cloud computing.<\/p>\n
The current selloff rivals only \u200ca handful of periods since 1995, including the dot-com crash of 2000-2001, when the spread plunged below negative 25.<\/p>\n
To be \u2060sure, historically, such extreme readings have sometimes preceded either capitulation selling or marked attractive entry points for contrarian investors, though the 2000-2001 period showed underperformance could persist for extended \u200bstretches.<\/p>\n
For now, the selloff has left many U.S. software stocks smarting from eye-watering losses since the S&P technology sector peaked in late October.<\/p>\n
Oracle (ORCL-N<\/a>) is the loss leader, having shed nearly 50 per cent, from October 29 to February 5, while ServiceNow (NOW-N<\/a>) and AppLovin (APP-Q<\/a>) each tumbled more than 40 per cent.<\/p>\n Gartner, Palantir, Intuit, Datadog , and Workday were also swept away in the selloff.<\/p>\n The swoon in software stocks comes amid a broader market shift away from technology.<\/p>\n The heavyweight tech \u200bsector has stumbled since its late-October peak, sinking some 10 per cent over that time as of Friday morning trading.<\/p>\n Other areas of the market have thrived over that period.<\/p>\n The energy, materials, consumer staples and industrials sectors all have climbed at least 10 per cent over that time, during which eight of the 11 S&P 500 sectors have posted gains.<\/p>\n Yet the overall S&P 500 is little changed over that time. With the tech sector still accounting for nearly one-third of the weight of the benchmark index, investors are concerned that the market will struggle to make headway if tech continues to struggle. <\/p>\n On Friday, the Dow Jones Industrial Average rose \u2060above 50,000 points for the first time, helped by a rally in shares of Nvidia.<\/p>\n While selling pressure on software stocks eased on \u2060Friday, with the industry index rising, traders in the options market were hesitant to dial back expectations for more near-term stock gyrations.<\/p>\n