WASHINGTON, 9 February 2026 — A sharp selloff in U.S. software and services stocks has rattled investors and raised concerns that the artificial intelligence boom may be reshaping markets in unexpected ways, prompting questions over whether a rotation out of technology signals deeper risks for the AI trade.
After months of enthusiasm around artificial intelligence, global markets were jolted last week as software stocks from Europe to Asia sank on fears that rapidly advancing AI tools could disrupt traditional software business models. While a broader market rebound on Friday helped ease nerves, the outlook for U.S. software stocks, at the centre of the selloff, remains uncertain.
Despite a 2% rebound on Friday, options market participants stayed on high alert for further volatility, underscoring lingering unease about the sector’s near-term direction.
The selloff was triggered by the launch of a new legal tool from Anthropic’s Claude large language model, which reignited existential questions over the earnings durability of conventional software companies. Strategists said investors are increasingly questioning whether the long-assumed earnings-compounding nature of software businesses could be disrupted, fuelling a broader rotation into value and cyclical sectors such as consumer staples, energy and industrials.
Software Slump Deepens
Software and services stocks have dramatically underperformed the broader market, lagging the S&P 500 by nearly 24 percentage points over the past three months. That gap is close to the worst on record in data stretching back three decades.
The downturn marks a sharp reversal for a sector that delivered outsized gains in the post-pandemic period as investors bet heavily on digital transformation and cloud computing. Historically, similar extremes have been rare, rivalled mainly by the 2000–2001 dot-com crash, when sector underperformance exceeded 25 percentage points.
While such readings have sometimes preceded capitulation selling or created attractive entry points for contrarian investors, history also shows that underperformance can persist for extended periods.
Heavy Losses Across Big Names
Many U.S. software stocks have suffered steep declines since the S&P technology sector peaked in late October.
Oracle has been the hardest hit, shedding nearly 50% between October 29 and February 5. ServiceNow and AppLovin have each fallen more than 40%.
Other notable names swept into the selloff include Gartner, Palantir, Intuit, Datadog, and Workday.
Market Rotation Gathers Pace
The slump in software stocks comes amid a broader shift away from technology. The heavyweight S&P technology sector has fallen about 10% since its late-October peak, while other sectors have outperformed.
Energy, materials, consumer staples and industrials have each gained at least 10% over the same period, with eight of the 11 S&P 500 sectors posting gains. Yet the overall S&P 500 has remained largely flat, heightening concerns that the benchmark may struggle to advance if technology stocks continue to lag, given the sector still accounts for nearly one-third of the index’s weighting.
On Friday, the Dow Jones Industrial Average climbed above 50,000 points for the first time, helped by a rally in shares of Nvidia.
Volatility Remains Elevated
Although selling pressure eased slightly on Friday, options markets signal that investors remain wary. For the iShares Expanded Tech-Software Sector ETF, 30-day implied volatility stood at 41%, only marginally below a 10-month high of 45% reached on Thursday.
The elevated volatility suggests uncertainty over whether the worst of the selloff has passed. Meanwhile, short sellers appear positioned to benefit from further declines. As of Thursday, short interest in the ETF stood at 19% of free float, near record highs, according to data from Ortex Technologies.
Source: Reuters
