Software stocks are unraveling fast as investors rethink AI winners, pushing capital out of high-growth tech and back into value stocks and cyclical corners of the market.
Over the past week alone, the sector — tracked by the iShares Tech-Expanded Software Sector ETF (NYSE:IGV) — has fallen nearly 20%, extending losses to more than 30% from its late-October highs.
The catalyst isn't higher rates or weaker demand — it's growing fear that AI itself may disrupt the very companies once seen as its biggest beneficiaries.
In a note published Friday, Goldman Sachs equity strategist Ben Snider said markets are undergoing a fundamental rotation, with investors rapidly exiting AI-exposed software names and reallocating capital toward cyclical and value-linked sectors tied to the "real economy."
From Growth Engine to Risk Zone
Software names, long considered the market's most dependable growth plays, have been hammered by fears that generative AI models like Anthropic's Claude Cowork and Google's Genie 3 could undermine core business models.
The sector's forward P/E has dropped from 35x in late 2025 to about 20x, the lowest absolute level since 2014 and barely above the broader S&P 500.
Snider noted this drop marks the smallest valuation premium over the broader market since 2010. While consensus still sees 15% revenue growth for the sector — more than double the S&P 500's expected 6% — valuations now suggest the market doesn't believe those numbers will hold.
"The decline in valuations implies a reduction of roughly 10 percentage points in medium-term sales growth," Goldman wrote.
Price-to-sales ratios also cratered from 9x to 6x since September, though still at a 260% premium to the S&P 500. Net profit margins remain at two-decade highs, but investor positioning signals further pain ahead. Hedge funds recently slashed exposure, though they remain net long.
Meanwhile, large-cap mutual funds have been underweight software since mid-2025.
Capital Rotates Toward ‘AI-Insulated' Sectors
While software and data-intensive industries like media and business services plunged, value stocks and cyclicals roared higher.
Goldman's value factor surged 7% in a single week, while a basket linked to the U.S. industrial cycle jumped 13% — a sharp contrast to continued weakness in software and other data-intensive sectors.
Consumer staples and financials also surged, with technical factors like high short interest adding fuel.
The top-performing equity industries for the week were led by the SPDR S&P Regional Banking ETF (NYSE:KRE), up 5%, followed by the iShares U.S. Home Construction ETF (NYSE:ITB), up 4.5%, and the U.S. Global JETS ETF (NYSE:JETS), up 4%.
Snider noted that cyclical names now look insulated from AI risk — not because they'll benefit from AI, but because their business models are less exposed to automation displacement.
That's a sharp reversal from last year's market logic, where investors hunted for names with AI upside. Today, they're searching for AI safety.
“Although the volatility of recent moves appears exacerbated by technicals, we continue to recommend value as a factor and select cyclical pockets of the US equity market,” Snider said
What Comes Next For Software
Goldman Sachs pointed to past disruption cycles, noting that industries such as newspapers in the early 2000s and tobacco in the late 1990s didn't find a durable bottom until earnings expectations stabilized.
With the long-term impact of AI still uncertain, solid near-term results may not be enough to restore confidence in software names.
Even so, Goldman emphasized this isn't a wholesale exit call for software: select pockets, particularly vertical software and companies with proprietary data advantages, could hold up better than the broader group.
The broader signal from markets, however, is unmistakable — investors are no longer willing to pay up for growth stories alone, as capital shifts toward value, cyclicals, and old-economy businesses offering tangible assets, near-term cash flow, and insulation from disruption risk.
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