There have been multiple AI-related selloffs since ChatGPT entered the mainstream, but the latest market turmoil stands apart in both speed and scope. “In the span of two days, hundreds of billions of dollars were wiped off the value of stocks, bonds and loans of companies big and small across Silicon Valley.”
Software stocks were hit hardest. The value of companies tracked by the iShares Expanded Tech-Software Sector ETF has “dropped almost $1 trillion over the past seven days,” pushing the fund to its lowest level since April.
Unlike earlier downturns driven by bubble fears, this selloff reflects something different. Investors are increasingly concerned that “AI is on the verge of supplanting the business models of a wide swathe of companies that doomsayers have long predicted were at risk.”
Not a Panic, but a Repricing
Market participants argue the reaction reflects a fundamental shift rather than panic. “I don’t think it is an overreaction,” said Michael O’Rourke, chief market strategist at Jonestrading. “For two years, we have been talking about how AI is going to change the world and that it is a multi-generational technology. In the past few weeks, we have seen signs of it in practice.”
A Small Announcement With Big Consequences
The immediate trigger appeared modest. Anthropic PBC unveiled a new AI tool designed to handle legal tasks such as reviewing contracts. On the surface, it was “a four-paragraph product-launch announcement.”
But coming after a year in which Anthropic’s coding tools “had revolutionized software development,” the news carried more weight. Investors did not necessarily view this specific product as transformative, yet “the steady drip of releases are potentially just as momentous to investors as ChatGPT’s debut was.”
Jackson Ader, an analyst at KeyBanc, summed up the concern: “While today it’s legal tech, tomorrow it might be sales or marketing or finance.”
Selling Spreads Beyond Software
The selloff quickly expanded beyond legal software. “Selling has spread across many parts of the software sector, from legal software firms to data analytics companies, and even engulfed financial-services stocks.”
Anxiety intensified later in the week when Alphabet Inc. disclosed it would spend far more on AI than expected, and Arm Holdings issued a sales forecast that disappointed investors. “Both stocks slid in after-hours trading.”
Pressure Hits Credit and Private Equity
The fallout has also reached Wall Street firms backing the tech sector. “The rout has also widened to include the industry’s Wall Street backers, from lenders to private equity owners for whom software firms have been popular targets.”
More than “$17.7 billion of US tech company loans in a Bloomberg index dropped to distressed trading levels during the past four weeks.”
So Far, Mostly Fear — Not Results
Despite the market reaction, much of the concern remains theoretical. Major players like ServiceNow Inc. and Salesforce Inc. “haven’t missed earnings numbers or told Wall Street that AI was causing them to lose customers.”
Many software firms have spent years developing in-house AI tools, often highlighting security and the ability to use existing customer data. Even so, results have been underwhelming. Microsoft Corp. said it had “15 million paying users of its Copilot tool — a tiny sliver of the company’s user base of hundreds of millions.”
An Early Sorting of Winners and Losers
The latest developments reinforce fears that AI-native leaders could outpace established companies in innovation — and that the adjustment may arrive faster than expected.
“It is going to be an interesting year,” said Dec Mullarkey, managing director at SLC Management. “What we’re seeing now is kind of the early stages of this repositioning on who are going be the winners and losers, who are the most vulnerable as we go through this process.
