The worst start to the new year! US software stocks collapsed because Claude Code was so popular

# Source: Wall Street Insights

By Ye Zhen

The viral success of Claude Code has amplified market fears of disruptive upheaval in the software industry. A basket of SaaS stocks tracked by Morgan Stanley has tumbled 15% since the start of the year, marking the worst annual opening performance since 2022. Many buy-side institutions argue there is currently "no reason to hold" software stocks, with no catalyst for valuation re-rating in sight in the short term.

The breakout popularity of Claude Code has reignited concerns over AI-driven disruption in the software sector, sending U.S. software stocks to their worst start to a year in years.

Since the year began, the Morgan Stanley-tracked SaaS stock basket has plummeted 15%, extending a 11% decline in 2025 and hitting the poorest opening performance since 2022. In terms of valuations, the software stocks followed by Morgan Stanley are now trading at 18 times their expected earnings over the next 12 months, a record low and far below the historical average of over 55 times in the past decade.

The panic spread rapidly after Anthropic launched its new service named **Claude Cowork** on January 12.

As previously reported by Wall Street Insights, Claude Opus 4.5, the latest version of Claude Code, has demonstrated remarkable capabilities. Some users noted that they completed complex projects that would have taken a year in just one week using this tool, and many shared experiences on social media of developing their first software without any prior programming knowledge.

The sell-off has widened the performance gap between software companies and other segments of the tech sector. While the Nasdaq 100 Index hovers near all-time highs, shares of companies like ServiceNow Inc. have slumped to multi-year lows. Intuit Inc., the parent company of TurboTax, plunged 16% last week, posting its biggest weekly drop since 2022; both Adobe Inc. and Salesforce Inc. fell more than 11%.

Despite the highly attractive valuations, Wall Street analysts point out that amid the disruptive uncertainties brought by AI, many buy-side institutions believe there is currently "no reason to hold" software stocks, with no catalyst for valuation re-rating visible in the short term.

## Claude Code Amplifies Disruption Fears

The trigger for the sell-off was Anthropic’s release of Claude Cowork, a "research preview" service. According to the company, the tool can create spreadsheets from screenshots or draft reports based on various notes, and it was primarily developed rapidly using AI.

Although the tool has not yet been fully validated, Jordan Klein, a technology industry expert at Mizuho Securities, noted that the capabilities it demonstrates are exactly what investors have been worried about, reinforcing the market’s increasingly bearish stance on software stocks.

As reported by Bloomberg, Bryan Wong, portfolio manager at Osterweis Capital Management, said: "The news about Anthropic underscores the difficulty of assessing future growth prospects. The pace of change is unprecedented, which has pushed uncertainty about the future to a peak."

In a client note on January 14, Klein bluntly stated that many buy-side investors believe there is no rationale to hold software stocks at present, no matter how cheap the share prices are or how steep the declines have been, because there is no catalyst to drive valuations higher.

## Slow Progress in AI Transformation at Software Companies

Most software makers have yet to demonstrate significant appeal with their own AI products. Salesforce has been promoting the adoption of its Agentforce product, but its impact on revenue has been unremarkable. Adobe has integrated generative AI features into its photo and video editing software, but did not update some AI-related metrics in its latest quarterly earnings report in December.

Wong said that existing software companies have advantages in areas such as distribution and data, but they need to show accelerating growth to drive a stock rebound, which seems unlikely in the short term. According to Bloomberg Intelligence data, earnings growth for software and services companies in the S&P 500 Index is expected to slow from approximately 19% in 2025 to 14% in 2026.

In contrast, the fundamental outlook for other tech segments is more optimistic. As tech giants such as Microsoft, Amazon, Alphabet and Meta Platforms have pledged massive investments in AI infrastructure this year, chipmakers like NVIDIA have clearer visibility on revenue growth. According to Bloomberg Intelligence data, semiconductor-related stocks are projected to see profit growth of nearly 45% in 2025, accelerating to 59% in 2026.

"The reason chipmakers are performing well is that their fundamentals are improving significantly, and given their customer base, the certainty of growth is much higher," said Jonathan Cofsky, portfolio manager at Janus Henderson Investors. "At the same time, the uncertainty surrounding how AI will transform the software ecosystem is far greater."

## Low Valuations Spark Divisions

Despite valuations dropping to historic lows, there are divisions in the market over the prospects of software stocks.

"Software companies have high valuation multiples because they are based on subscription models with recurring revenue that can be extrapolated almost indefinitely," Wong said. "If they have to compete against AI agents that run around the clock, can complete tasks, and finish large-scale projects in a single day, it’s hard to determine what multiple they should trade at."

However, some Wall Street institutions are optimistic about a rebound in the sector. Barclays expects software stocks to "finally turn a corner" in 2026, as customer spending remains stable and valuations are attractive. Goldman Sachs anticipates that rising AI adoption will bring more tailwinds to software companies by expanding the total addressable market. D.A. Davidson believes that 2026 is a good time to selectively re-enter the sector, as narratives have overshadowed the fundamentals of many software companies.

"We can’t say the inflection point has arrived yet, because existential concerns about AI will persist for some time, but the sector does look more attractive," said Chris Maxey, managing director and chief market strategist at Wealthspire, which manages $580 billion in assets. "It’s not a clear buy opportunity yet, but we are approaching that point."

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