Software stocks are witnessing their worst month since the Lehman Brothers collapse.
Investors are now reassessing whether traditional business models can withstand the rapid advance of artificial intelligence. The iShares Expanded Tech-Software Sector ETF (NYSE:IGV) is on pace for its steepest monthly drop since October 2008.
The selloff intensified Thursday, when the sector plunged roughly 6% in a single session — its worst day since March 2020.
The move followed a collapse in Microsoft Corp. (NYSE:MSFT), which dropped more than 12% – the stock’s worst day since the lockdown shock.
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Indeed, Microsoft beat Wall Street expectations in its latest financial disclosure. But investors instead focused on slowing Azure cloud growth and cautious guidance. This is reigniting concerns about the pace and durability of AI monetization.
High-flying software names like Palantir Technologies Inc (NASDAQ:PLTR), Oracle Corp (NASDAQ:ORCL), AppLovin Corp (NASDAQ:APP) are all down about 20% for the month.
The selloff has traders asking whether this move is technical or something more structural.
Wall Street analysts are increasingly leaning toward the idea that the sector selloff reflects changing fundamentals and not short-term disappointment — as AI begins to rewrite how software is built, sold, and consumed.
Thomas Shipp, head of equity research at LPL Financial, posed a blunt question in a Thursday note: “Can software survive AI?”
“The software business has been one of the best businesses historically,” Shipp said. “It is inherently scalable, as once software has been developed, there is a very low incremental cost each time it is sold.”
Shipp said subscription-based models have traditionally justified premium valuations. He added those premiums could return if software avoids displacement by AI.
“That said, software companies that are not a system of record do have some risk of displacement,” Shipp said.
“Most, if not all, software producers, will need to offer their own AI enhancements to maintain their market share going forward.”
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