U.S. software stocks fell sharply Thursday after weak cloud forecasts from SAP and a post-earnings drop in ServiceNow intensified investor fears that rapid advances in artificial intelligence are undercutting traditional subscription-based software providers.
U.S.-listed software companies were among the biggest decliners on the Nasdaq as investors reassessed growth prospects for enterprise software firms facing intensifying competition from AI-driven tools. The S&P 500 Software and Services Index slid 8.7% to a nine-month low, extending losses that have pushed the sector down more than 13% over the past year.
SAP, ServiceNow Results Spark Broad Selloff
Shares of Germany-based SAP plunged more than 16% after the company issued a weaker-than-expected outlook for its cloud business. Analysts said SAP’s cloud backlog and its 2026 revenue forecast fell short of market expectations, raising doubts about its ability to keep pace with faster-moving AI-focused rivals.
U.S. Software Stocks dropped nearly 10%, marking a third straight session of losses, despite the company forecasting annual subscription revenue above Wall Street estimates. The decline underscored investor skepticism toward even solid earnings reports in the current market environment.
“The malaise in software sentiment persists, coupled with a seemingly paradoxical and vicious cycle of depressed valuations with maintained, if not rising, investor expectations,” J.P. Morgan analysts said in a research note.
The selloff spread quickly across the sector. Salesforce fell about seven percent, Adobe lost nearly four percent, and Datadog dropped more than eight percent. Atlassian slid more than 12 percent, while HubSpot fell roughly 11 percent. Cloud security firms Zscaler and Datadog also posted steep losses.
Investors Worry AI Erodes SaaS Business Models
Investors have grown increasingly concerned that advances in artificial intelligence — including tools that can rapidly generate software code and applications at lower cost — could weaken demand for traditional software-as-a-service products sold through long-term subscriptions.
“All these software names are performing terribly because the market is pricing a worst-case scenario that software is dead because AI is disrupting the space,” said Adam Turnquist, chief technical strategist at LPL Financial.
Those fears have weighed on valuations even as many companies continue to report revenue growth. ServiceNow, for example, recently posted higher quarterly earnings and double-digit revenue gains, but that was not enough to reassure investors focused on longer-term competitive threats.
Microsoft also drew scrutiny after saying it spent a record amount on AI investments in the last quarter while reporting slower growth in its cloud-computing business. Its shares fell more than 12 percent, adding pressure to the broader technology sector.
In response to rising competition, several software companies have pursued acquisitions to strengthen their AI capabilities. ServiceNow last year bought cybersecurity firm Armis for $7.75 billion, while Salesforce acquired data management company Informatica for about $8 billion.
Chipmakers Gain as Software Shares Hit Lows
While U.S. software stocks struggle, companies tied more directly to AI infrastructure have emerged as market winners. Chipmakers and memory storage firms have posted strong gains as demand rises for the hardware needed to support AI computing.
The Philadelphia Semiconductor Index has climbed sharply in January, and memory companies such as SanDisk and Western Digital have also advanced. Investors see those firms as more direct beneficiaries of AI spending, compared with software companies facing potential disruption to their business models.
The contrast highlights a growing divide within the technology sector, as enthusiasm for AI continues to reshape investor expectations and capital flows.
