The new automated tool launched by AI startup Anthropic on Tuesday triggered panic selling in software stocks, leading to a broad decline across the three major U.S. stock indices.
Legal software and data service companies bore the brunt of this round of sell-off. The iShares Expanded Tech-Software Sector ETF (IGV), which tracks the tech software sector, hit a new intraday low with a drop of 5.6%, extending its losing streak to six consecutive days by Tuesday, with a cumulative decline exceeding 14%. The ETF has already fallen about 15% in January, marking its worst monthly performance since 2008.
The core market concern lies in the threat that AI technology poses to the core business of software companies. Analysts including Toni Kaplan from Morgan Stanley noted in a research report that the new features Anthropic introduced for the legal field intensify industry competition and could have a negative impact. Concerns about industry turmoil have already triggered turbulence in global credit markets.
Wall Street’s pessimism towards software stocks has evolved from caution into a kind of “apocalyptic” panic. Jeffrey Favuzza, a trader at Jefferies, termed it the “SaaSpocalypse” – the apocalypse for Software-as-a-Service (SaaS) stocks – characterized by a “sell at any cost” trading style. The escalation of anxiety directly stems from Anthropic’s release of a productivity tool for in-house lawyers. This worry has been brewing for months and intensified significantly in January after Anthropic launched the Claude Cowork tool, heightening market fears of industry disruption. Last week, as Alphabet unveiled its Project Genie tool capable of creating virtual worlds, video game stocks were also swept into the selling wave.
Anthropic is one of many AI startups developing tools for the legal industry, but its unique position deepens market anxieties. Unlike many companies that rely on third-party models, Anthropic builds its own models and can customize them according to industry-specific needs. As a primary model developer, its position in the AI ecosystem grants it the potential to disrupt traditional legal services and even emerging legal AI companies. On its plugin website, Anthropic’s legal tools can automate tasks like contract review but also state that all outputs require review by a licensed attorney.
Even software giants have not been spared from the impact of the AI wave. Microsoft (MSFT) reported solid earnings last week, but investors focused on the slowdown in its cloud sales growth and took a fresh look at its AI spending, causing its stock to plummet 10% last Thursday. It fell another over 3% intraday on Tuesday. January became Microsoft’s worst-performing month in over a decade. Thomas Shipp, head of equity research at LPL Financial (LPLA), pointed out that the fear brought by AI is increased competition, greater pricing pressure, and a shallowing of competitive moats.
Despite the broad market decline, most S&P 500 constituent stocks still advanced. FedEx (FDX) continued its rally, and Walmart (WMT) saw its market capitalization surpass $1 trillion. Market analysis suggests a sector rotation is occurring in U.S. stocks. Among AI-related stocks, big data analytics company Palantir (PLTR) bucked the downtrend with a sharp rise, closing up nearly 7% on Tuesday as its fourth-quarter revenue and annual revenue guidance far exceeded expectations.
Some investment professionals view the sell-off in software stocks as an opportunity. For example, some funds purchased Microsoft stock during the downturn, anticipating it will ultimately emerge as an AI winner. Currently, Microsoft’s price-to-earnings ratio based on estimated earnings is about 23 times, near its lowest level in about three years, with technical indicators showing oversold conditions. More broadly, the valuation multiples for software indices are also at multi-year lows.
