Software Sector Faces Prolonged Decline Amid AI Concerns
Shares of U.S. software and data services firms continued their downward trajectory on Thursday for the seventh consecutive session, as investor apprehension surrounding the rapid advancement of artificial intelligence tools threatens to disrupt the sector.
The S&P 500 software and services index plummeted by 4.6%, shedding approximately $1 trillion in market capitalization since January 28, a downturn now referred to as “software-mageddon.”
Significant players severely impacted by this downturn include ServiceNow, witnessing a decline of 7.6%, while Salesforce and Microsoft recorded drops of 4.7% and 5%, respectively.
“Currently, we are observing a pervasive sell-off mentality,” remarked Dave Harrison Smith, Chief Investment Officer and Head of Technology Investing at Bailard.
Thomson Reuters, headquartered in Canada, experienced a record one-day plunge earlier this week following investor apprehensions concerning a new plug-in from Anthropic’s Claude, which could potentially disrupt its legal operations.
The company saw a further decline of 5.6%, despite announcing a dividend increase and reporting fourth-quarter results largely in line with analyst expectations.
Ownership of the Westlaw legal database and the Reuters news agency, Thomson Reuters, is reportedly experiencing tangible benefits from its investments in AI technologies.
“The ambiguity surrounding the eventual ramifications of AI renders forthcoming earnings reports crucial indicators of business resilience, albeit often insufficient to dispel long-term downside risks,” explained Ben Snider, Chief U.S. Equity Strategist at Goldman Sachs.
This cloud of uncertainty has deterred potential dip buyers. “There has been no substantial dip-buying activity…yet we seem to be approaching a pivotal moment,” noted Nick Giorgi, Chief Equity Strategist at Alpine Macro.
On Thursday, the S&P 500 software and services index traded approximately 21% below its 200-day moving average, marking the most significant deviation beneath this essential technical threshold since June 2022.
“What we are witnessing is akin to multi-decade washouts…often, these scenarios represent favorable entry points,” Giorgi added.
Smith from Bailard suggested that the sell-off may create avenues for astute stock pickers, though he cautioned against expecting an immediate recovery. “Identifying the bottom during such a climate of sentiment is exceedingly arduous,” he articulated.
Intensified Rotation Away from Technology
The software sell-off has coincided with a broader shift away from technology and towards value-oriented sectors, including consumer staples, energy, and industrials, which had previously lagged during the bull market that commenced in October 2022.
“We are witnessing a generalized de-risking from technology, a trend that has been evident since the year began,” stated Andrew Wells, Chief Investment Officer at SanJac Alpha in Houston.
In line with this bearish sentiment, short interest in mid- to large-cap software firms has escalated over the past three months, as reported by data analytics company Ortex.
Notably, cybersecurity and Software as a Service (SaaS) companies have observed the most pronounced increases in such bearish positions.
Goldman Sachs data highlighted a recent sharp decline in hedge funds’ exposure to software companies, although these funds maintained a net long position in the sector.
“After years of tech-driven market dominance, the balance of power is shifting as investors pivot toward traditional ‘old economy’ sectors,” remarked Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones, in a recent note.
Unwinding of Leveraged Positions Exacerbates Market Pressure
The ongoing sell-off also extended to sectors linked to software companies, such as asset management firms, amid concerns regarding their exposure to private credit loans.
Alternative asset manager Blue Owl, set to experience its 11th straight day of losses, revealed that its exposure to the software sector constitutes 8% of its assets under management.
Performance among international tech stocks showed mixed results. The London Stock Exchange Group rose 5.8%, while data analytics firm RELX climbed 2.9%, and Netherlands-based Wolters Kluwer increased by 2%.
In contrast, the Indian software exporters index, which includes firms such as HCL Technologies and Wipro, experienced a decline of 0.7%, following a staggering 6% drop the previous day, its most significant fall in nearly six years.
Widespread Market Volatility
Market volatility has surged across equities, commodities, and digital assets in recent weeks. Market participants attribute this upheaval to leveraged investors being compelled to rapidly liquidate positions.
Wall Street’s most closely monitored gauge of investor anxiety, the Cboe Volatility Index, climbed by 3.13 points, closing at 21.77, its highest level since November 21.
Precious metals, including gold and silver, resumed their descent on Thursday following a historic downturn earlier in the week, while Bitcoin plummeted by 13% to $62,890.
“This situation highlights the multitude of relative bets going awry, leading to an inevitable reset in market internals, though only time will reveal the full ramifications,” stated John Hardy, Saxo’s Global Head of Macro Strategy, during a recent podcast.
Source link: M.economictimes.com.
