Wall Street’s AI Anxiety-Induced Software Selloff Gets a Reality Check

New AI tools can produce websites and automate enterprise workflows in a matter of seconds, like magicians snapping their fingers to reveal not a dove or rabbit but updated CRM records. And, this month, that’s been the scariest thing on Wall Street.

Fear that this magic touch could replace the role of software companies has obliterated billions in market value. On Wednesday, however, most of the affected firms got a break.

The Long and the Short of IT

The iShares Expanded Tech-Software Sector ETF has tumbled more than 23% this year, as leading software companies including Adobe, Salesforce and ServiceNow have declined by more than a fifth. What got us here is simple. New and updated AI models like Google’s Gemini 3 and Anthropic’s Claude 4.6 appear capable of making tools that could compete with software makers, which threatens to squeeze their profit margins like the oranges at an AI startup’s in-house juice bar.

Shares in UK software group Pinewood Technologies slid over 30% this week after private equity firm Apax Partners walked away from a $776 million acquisition offer. By mid-week, sentiment appeared to shift: the iShares Expanded Tech-Software Sector ETF rose 1.3% on Wednesday, while AI hyperscalers like Amazon, Meta and Microsoft, whose shares slumped amid concerns about spending plans, also gained. It wasn’t all rosy, though: Cybersecurity firm Palo Alto Networks sank 6.8% after its guidance disappointed Wall Street despite better-than-expected second-quarter results and CEO Nikesh Arora’s assertion that AI isn’t replacing cybersecurity software “any time soon.” Some analysts say the selloff may be partially misguided:

• “The market is selling indiscriminately,” JPMorgan analysts wrote earlier this month. For those who “believe Claude Code is just another DeepSeek moment,” they added, “current software valuations are worth a look if you want to find an entry point.”
• Last week, Goldman Sachs rolled out a list of stocks the bank expects to “recover from the recent software selloff,” among them Cloudflare, CrowdStrike, Microsoft, Oracle, and — wouldn’t you know it — Palo Alto Networks. On the other hand, Goldman’s list of “lag behinds”  includes Accenture, Monday, Salesforce, DocuSign and Duolingo.

Executive Decision: Among the gainers in the software sector on Wednesday was ServiceNow, whose shares rose 1.8% thanks to a bold vote of confidence from insiders. A day earlier, executives at the cloud computing and business workflow firm canceled regularly scheduled stock sales and CEO Bill McDermott pledged to buy $3 million in shares, essentially declaring they believe they’re sitting on a bargain.