Wall Street’s love affair with software stocks has taken a sharp turn—sliding from cautious skepticism into what traders are calling a full-blown “SaaSpocalypse.” Fear of AI-driven disruption has sent shares tumbling across the sector, with even giants like Microsoft feeling the heat.
“Trading is very much ‘get me out’ style selling,” said Jeffrey Favuzza, equity trader at Jefferies. “The pendulum has swung so far to the sell-everything side, there will be super-attractive opportunities, but investors are waiting for acceleration to separate winners from losers.”
Historic Selloffs Shake the Industry
The panic has hit all corners of software. Last week, Microsoft (MSFT) shares fell 10%, marking their worst month in over a decade, despite strong earnings. Video-game publisher Take-Two Interactive (TTWO) posted its largest weekly drop since November 2022, tumbling 10% after Alphabet launched Project Genie, an AI tool capable of generating immersive worlds from text and images.
Legal software companies were also pummeled after Anthropic’s latest AI tool for in-house lawyers sparked renewed fears of disruption. The S&P North American Software Index has now fallen for three consecutive weeks, wiping out 15% in January—the biggest monthly decline since October 2008.
“People are just selling everything and don’t care about the price,” Favuzza added. “There’s no conviction on where to hold your nose anymore.”
Earnings Beat Doesn’t Calm Investors
Despite these plunges, earnings remain solid, but investors are focusing on long-term disruption risk rather than short-term numbers.
Microsoft reported strong revenue and earnings, yet investors fretted over slowing cloud growth and high AI spending.
ServiceNow and SAP SE similarly delivered results that failed to reassure the market.
Even so, Palantir Technologies (PLTR) bucked the trend. The company posted 70% revenue growth in Q4 and provided bullish revenue guidance for 2026, sending its shares higher.
“The fear with AI is that there’s more competition, pricing pressure, and shallower moats, making companies easier to replace with AI,” said Thomas Shipp, head of equity research at LPL Financial.
Downgrades Hit Big Names
Wall Street analysts have reacted aggressively:
Piper Sandler downgraded Adobe (ADBE), Freshworks (FRSH), and Vertex (VRTX), citing “seat-compression and vibe coding narratives” that could cap multiples.
Concerns are mounting that AI will compress profit margins and shake up competitive advantages, especially for firms without dominant market positions.
Some Investors See Opportunity
Not everyone is panicking. Sycomore Sustainable Tech, a European fund that has outperformed 99% of its peers over three years, added Microsoft shares during the selloff, betting the software giant will emerge as an AI leader.
From a valuation perspective:
Microsoft trades at less than 24x estimated earnings, its lowest in three years.
Technical indicators, like the 14-day RSI, suggest the stock is approaching oversold territory.
The broader software index multiple is also at multi-year lows, hinting at potential for a bounce.
“The software sector is probably oversold enough for a bounce,” said Jonathan Krinsky, chief market technician at BTIG. “But it will take a long time to repair and build a new base.”
Key Takeaway: AI Winners vs. Losers
The central challenge for investors is identifying the AI winners. While some software companies are likely to thrive, others may struggle or even collapse.
“If Microsoft is struggling, imagine how bad it could be for companies more exposed to disruption or without dominant positions,” Favuzza said.
For now, Wall Street sits in a state of heightened uncertainty, selling broadly while waiting for the market to separate the companies that can leverage AI from those that will be left behind.
Top Software Stories & Earnings to Watch
Palantir Technologies (PLTR): Strong Q4 revenue and bullish guidance
Elon Musk merges SpaceX and xAI: Combined entity valued at $1.25 trillion
Oracle Corp.: Record demand for $25B bond sale, alleviating some AI fears
Uber Technologies: Expands ride-hailing to Macau
Nintendo Co.: Profits up 23%, but margins hurt by US tariffs and rising memory chip costs
Earnings on Tuesday: Gartner (IT US) premarket; AMD, Cirrus Logic, EA, Take-Two, and several other software names postmarket.
Bottom line: The “SaaSpocalypse” may be terrifying on the surface, but for patient investors willing to separate AI winners from losers, the current selloff could also mark a rare opportunity to buy software stocks at historically discounted levels.