Why Wall Street is Abandoning Software Stocks: The Structural Crisis of the AI Era

Large investment banks on Wall Street are keeping a close eye on software companies. Recent market trends are showing a fundamental breakdown of confidence across the entire industry, beyond mere price adjustments. Concerns are spreading among investors that rapid advancements in AI technology threaten existing software business models.

Software Stocks Under AI Influence: Wall Street’s ‘Newspaper Industry’ Warning

While the software sector has recently been the market’s focus, investor sentiment has completely reversed. Software stocks, which plunged 15% in a week, have now fallen a total of 29% from their September 2025 highs. Analysis reports from major Wall Street investment banks are filled with expressions of extreme concern about the current crisis.

The core of the analysis is here: The once-common scenario of ‘productivity gains’ has now shifted into a direct threat to the pricing power, market defensibility, and even the very existence of software companies. What the investment bank analysts are highlighting is a comparison of the fate of the software industry to that of the newspaper industry, which was overtaken by the internet in the early 2000s, or the tobacco industry, which faced regulatory blows in the late 1990s. This is not just a downward revision of earnings but indicates that investors are beginning to recognize the industry’s long-term decline potential.

The launch of Anthropic’s Claude plugin and Google’s latest AI models has triggered this shift in market sentiment. Wall Street now believes these technologies could erode the profit structures of traditional software companies.

Concerns About ‘Growth Collapse’ Rather Than Cheap Rebound

On the surface, the valuation of software stocks appears significantly depressed. The forward P/E ratio has fallen from about 35x at the end of 2025 to roughly 20x now, and the valuation premium over the S&P 500 is at its lowest in over a decade.

However, what Wall Street analysts emphasize is different. The expected profit growth rate for software companies remains at its highest level in the past 20 years and is well above the S&P 500 average. This suggests that the current low valuation is not the true bottom but reflects a significant downward revision of future growth prospects.

A concrete comparison makes this gap clear. When software stocks maintained a 36x P/E in September 2025, they assumed a mid-term earnings growth of 15-20%. Now, with the valuation dropping to about 20x, it implies a downward revision to a 5-10% growth assumption. The market is already pricing in a ‘growth cliff.’

Lessons from History: The Bottom Is Determined by Psychology, Not Price

How do past cases shed light on the current situation? The newspaper industry declined an average of 95% between 2002 and 2009. The key point is that the true bottom is not when macroeconomic conditions improve or prices fall enough. Stocks only rebounded after profit expectations stabilized and further downward revisions ceased.

The tobacco industry showed a similar pattern. After regulatory uncertainties in the late 1990s were resolved and ‘major settlements’ were reached, stock pressure eased. No matter how low prices go, if investors doubt long-term growth, a bottom will not form. That is the lesson from history.

Wall Street’s citing of these examples indicates a very sober view of the current situation. Even if short-term results look solid, the long-term erosion risks posed by AI cannot be denied.

Capital Outflows: Wall Street’s New Direction

The most realistic signal now comes from the flow of funds. Hedge funds have recently significantly reduced their exposure to the software sector, and large mutual funds have been systematically underweight software stocks since mid-last year.

At the same time, capital is clearly flowing into sectors less affected by AI shocks. Typical cyclical industries such as industrials, energy, chemicals, transportation, and banking are at the center of this trend. The strong recent performance of value factors and industry cycle-related portfolios tracked by Wall Street confirms this.

However, some niche software companies still show resilience. Vertical software deeply integrated into industrial processes has high switching costs, making direct AI replacement difficult. Data-driven information services and commercial service firms with proprietary data and clear market barriers may also be overestimating AI’s impact.

Profit Stability Recovery Is Key: Wall Street’s Final Warning

The conclusion is clear: stocks can only bottom out when profit expectations truly stabilize. Over the past two years, the core narrative for software stocks was ‘AI will accelerate growth,’ but Wall Street’s recent shift signals a major turning point. The market is now seriously questioning whether ‘AI will undermine the commercial value of software itself.’

The real issue is not whether software stocks can rebound but whether they can prove they will not become the next ‘newspaper industry.’ Wall Street is now in a waiting stance, and this waiting period is testing investors’ patience.