InvestIdeas

Triggered by a new legal tool from Anthropic, which showed the AI industry's growing push into industries that can unlock lucrative enterprise revenue needed to fund massive investments in the technology.

That push has sparked fears of disruption in industries ranging from finance to law and coding.

OpenAI and Anthropic are under pressure to justify their steep valuations.

The S&P 500 software and services index .SPLRCIS slid nearly 13% over five straight sessions and is down 26% from its October peak, whereas the S&P 500 .SPX scaled an all-time high just this week.

We are not yet at the point where AI agents will destroy software companies, especially given concerns around security, data ownership and use".

One trigger for Tuesday's selloff was Anthropic's launch of plug-ins for its Claude Cowork agent on Friday, enabling automated tasks across legal, sales, marketing and data analysis.

Software companies that act as systems of record, holding important corporate data, are more deeply entrenched.

So far this year, Microsoft is down 16%, Shopify is down 26%, Adobe is down 27%, and Salesforce is down 30%.

J.P. Morgan suggests that the recent AI-driven software sell-off is overblown.

If AI companies are going to disrupt, destroy, and replace all software companies, those AI stocks should be more valuable.

Or if AI is overvalued and those big capital expenditures are never going to pay off, software stock investors should be less worried about their companies getting wrecked by AI.

Investors seem to be shying away from the entire tech sector without a sound reason.

Software companies tend to offer specialized solutions that add value for specific industries and use cases, based on proprietary data stacks. AI companies can't replace all those competitive advantages -- for now.

Under the SaaS model, software created value by organising human labour through tools like customer relationship management (CRM) and project management, while under the AI agentic model, software creates value by executing the work itself.

Larger, complex platforms with substantial codebases and deep workflows — such as Microsoft, Oracle, Salesforce, ServiceNow and Intuit, which focuses on accounting and tax software — are insulated.

Also safe are Palantir, Snowflake Inc and privately owned Databricks. Others in the same category are security based software firms like CrowdStrike Holdings Inc and Palo Alto Networks Inc.

Software businesses need to demonstrate that they can grow revenues even as headcount at corporate customers remains flat.

Software firms need to cut costs to protect their profits as the onslaught from AI agents intensifies.

Others will need to embrace AI. That means cannibalising their own revenue with a new business model and lower margins.

Tech loans represent 17 per cent of outstanding loans in the leveraged market, valued at US$260 billion.