Software's slippery slope

Software stocks have been ground zero for the market’s latest AI jitters, with the industry as a whole sliding about 15% in the past week. The selloff quickly spread to related parts of the market like media, education, and asset managers, while the Russell 3000 fell 10% over the same period, trading in unusually tight lockstep with software.

According to Goldman Sachs, the pain isn’t over yet.

An incomplete reset

Ben Snider, Goldman’s chief US equity strategist, argues that valuations for software stocks have adjusted, but growth expectations are lagging.

Last week’s software selloff pushed the industry’s forward P/E multiple from 36x in September 2025 all the way down to 21x today, the lowest absolute level since 2014. But consensus growth estimates for the industry haven’t caught up with the recent downturn, with analysts still pricing in roughly 15% two-year forward revenue growth (the highest expected rate in two decades) and record-high margin forecasts—assumptions far richer than what today’s multiple typically supports. Snider thinks that falling software valuations point to a forthcoming decline in expected growth, and a subsequent slide in share prices.

History says he’s right. During the early 2000s, newspaper stocks plunged roughly 95% between 2002 and 2009 as the internet disrupted their businesses, with share prices only stabilizing once forward earnings estimates finally bottomed. With AI introducing similar structural questions for software, Goldman argues that a durable bottom is unlikely until earnings expectations fully reset.

Beyond fundamentals, positioning adds to the downside risk. Hedge funds have reduced software exposure but remain net long, leaving scope for further selling if estimates fall, while mutual funds are already underweight. That points to less volatility ahead, but not yet a full capitulation.

What’s old is new again

Investors are stepping back from cutting-edge tech and rotating into parts of the market seen as less exposed to AI disruption. Goldman continues to favor value, with consumer staples, retail, energy, and food and beverage among the least affected industries.

The rotation is already visible in markets: Industrials now trade at a higher valuation than technology, while non-tech sector funds have drawn about $62 billion of inflows in the first five weeks of the year, more than the roughly $50 billion they attracted in all of 2025, according to Deutsche Bank.

In other words: the AI disruption in the software industry is far from over, and investors may want to look elsewhere for a while until the dust settles.—SY