Software stocks have been wrecked so far in 2026. In fact, last week, they collectively entered a bear market. An article by Business Insider this week included a performance chart of the iShares Expanded Tech-Software ETF, which is down 27% since September.
AI Fear Sparks a Rapid Software Stock Sell-Off
The rout on these stocks has been driven by fears that AI will replace, or greatly reduce the demand for software. The plunge accelerated when AI company Anthropic released a new application that can access, read, and edit files.
Our LPL Research team says the thinking is, if internal development of these systems now takes developers less time with AI, why would anyone pay for software?
Software vs. Semiconductor Stocks: A Clear Market Divergence
Take a look at these two LPL charts which show the divergence between the performance of the Russell 1000 Software Subsector Index compared to the Russell 1000 Semiconductor Subsector Index. They are clearly going in opposite directions.
AI optimism is clearly being funneled into semiconductor stocks. The index is trading at about 43 times forward earnings, while the software index is trading at about 32 times forward earnings.
Why Enterprise Software Isn’t Going Away
LPL thinks investors should take a breath. Software is not going the way of DVD rentals and film cameras.
LPL writes that mass cancellations of enterprise software contracts in the short to medium term seem unlikely. They point to a recent webinar with analysts and IT executives, in which JPMorgan discussed how it is not abandoning enterprise software because of AI.
How Large Companies Are Actually Using AI
AI tools are being used, but adoption is practical and gradual. For large firms, a more realistic goal is to leverage AI tools to make existing users more productive, not to replace systems.
The dream of giving AI agents read and write access to the files used to run large enterprises seems far away and fraught with risks and data privacy concerns.
Is the Software Sell-Off Nearing a Bottom?
In fact, LPL believes there could be a floor to the software dip soon. They believe, when looking at a software to semis ratio, software has been deeply oversold and approaching a key support level.
Why Diversification Matters in the AI Economy
Bottom line: The development and application of artificial intelligence is one of the biggest disruptors to our economy in history, and it has created a whipsaw effect with many industries battling to find their place in the AI future.
Now more than ever, diversification matters. You don’t want to make big bets on individual stocks, or even individual sectors. This highlights the value of portfolio managers and working with a financial advisor to use diversification to reach your financial goals.
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