Investors are avoiding beaten-down software stocks, warning that the brutal selloff triggered by fears of displacement by artificial intelligence is likely only just beginning.
What’s quickly become known as the AI scare trade has ravaged major software names in the US and Europe in recent weeks. Fund managers at the likes of Amundi SA and Lazard Freres Gestion said it’s not yet time to venture back into the sector.
The software-as-service, or SaaS, industry group has borne the brunt of a sudden recognition among investors of the threat. Intuit Inc.’s 40% plunge so far this year, a slump of 33% for Workday Inc. and Dassault Systemes SE’s 32% drop are all prominent examples of what some traders have dubbed the “SaaSpocalypse.”
Olivier David, a fund manager at Vega IS, said the burden of convincing the market that they can withstand the disruption has shifted entirely to software firms. “It’s now up to the software companies to prove that they are relevant — they’re all sort of presumed guilty now,” he said. “I’m not ready to buy the dip across the sector.”
A UBS Group AG basket of European stocks seen as vulnerable to AI disruption posted a a modest rebound on Tuesday, before surrendering the gains. The basket, made up stocks like Wolters Kluwer NV, Pearson Plc and Capgemini SE, has fallen 18% since the start of the year.
The concerns over AI have spread to a broad range of sectors, from financial services to logistics, as the market struggles to price how the technology will affect business models. Analysts are scrambling to identify which stocks are the most vulnerable.
At Bernstein, a team looking at mid-cap companies has listed Atos SE, Ocado Group Plc, Aumovio SE and TeamViewer SE as “stocks still trading as though AI disruption is someone else’s problem.”
“Software company management are sending messages that all of this is nonsense, but at best they are ignored, at worst they are interpreted as a sign of weakness,” said Karen Kharmandarian, senior equity investment manager at Mirova in Paris. “The bulk of investors don’t want to hear about risky AI segments and are even preemptively looking for the next market segment likely to collapse,” he added.
At Amundi, Guy Stear, head of developed market strategy, said the rotation between companies seen as AI losers and the winners is just starting to unfold as investors assess the impact of advances like Anthropic PBC’s Claude tool.
“The AI scare trade is largely a work in progress and that’s why there is no rebound,” Stear said. “Claude is redefining the value of software and at the moment we just don’t know what it is. It’s impossible to tell how far the AI scare trade will extend at the moment.”
Stear advised clients to move toward “real hard assets,” such as industrials that enable AI deployment in the physical world.
The reluctance among fund managers to buy the software dip reflects a conviction that AI disruption will deepen, not fade. Mentions of AI disruption on management calls this earnings season almost doubled compared to the previous quarter.
Nick Evans at Polar Capital, whose fund beat 99% of peers, has warned that “application software faces an existential threat from AI” and that few firms are likely to survive.
Even after the recent moment of reckoning for software stocks, their valuations remain typically higher than the broader market, said Enguerrand Artaz, a fund manager at La Financière de l’Echiquier. “I can’t see myself buying back until I have a good idea of who’s going to emerge as a winner in the next 12 months,” he said.
For Thomas Brenier, head of equities at Lazard Freres Gestion, uncertainty about the industry’s future means buying the dip is currently not an option. “Given the lack of visibility about the impact of AI across the software sector, we are really not in a position to invest or reinvest in the stocks that de-rated over the past weeks.”
Other investors are studying inconsistencies caused by selling sprees that may present buying opportunities beyond core software and IT players.
Francois Rimeu, senior strategist at Credit Mutuel Asset Management, said he has strengthened some positions in more integrated companies whose business is not exclusively software-based and in cybersecurity stocks as among assets not directly under threat from AI.
“We did not increase our allocations to the software sector, despite the very significant declines,” Rimeu said.
Olivier Baduel, a fund manager at OFI AM, said investors would need to build portfolios around specific companies able to navigate the disruption, rather than broad sector-wide thematic plays. “This is going to be very much a year of stock-picking.”
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