The biggest decline since April last year, the Nasdaq fell for two consecutive years: software

# Source: Wall Street Insights

By Dong Jing

Wall Street's fears over the outlook for the software industry have triggered a sell-off, with panic spreading from SaaS to chips and AI infrastructure, and NVIDIA falling 9% this week. Some market strategists have questioned the link between NVIDIA and SaaS: "Investors are taking profits on profitable stocks to cover heavy losses in software stocks, which is more a reflection of traders' position adjustments."

Wall Street's concerns about the software sector are quickly evolving into a broader sell-off across the tech industry. As market panic spreads from SaaS to semiconductors and AI infrastructure, the pressure on tech stocks has intensified significantly.

On Wednesday, the Nasdaq Composite not only fell again but also posted back-to-back 1% daily drops for the first time since April last year. The core trigger for this volatility is a loss of investor confidence in the software industry's prospects.

The sell-off in SaaS stocks accelerated after startup Anthropic released a suite of new tools capable of industry-specific functions such as legal contract review. Markets are growing increasingly worried that artificial intelligence could disrupt existing software business models far more than expected, while also questioning whether tech giants can deliver on earnings promises amid sky-high valuations.

However, Michael Antonelli, a market strategist at Baird Private Wealth Management, noted that the phenomenon is more a reflection of traders' position adjustments than a fundamental reassessment of the overall market outlook.

"What does NVIDIA have to do with SaaS? People are taking profits on profitable stocks to cover their heavy losses in software stocks."

Notably, while traders said the sell-off remains orderly with no signs of a panic crash, elevated valuations have left the market extremely sensitive to any negative signals, and capital is now rotating out of tech stocks and into traditional sectors at an accelerated pace.

## Elevated Valuations Amplify Market Reactions

Wednesday's market action showed the decline has extended far beyond the software sector alone. AMD's share price plummeted 17% following a disappointing earnings report, marking its worst single-day performance since 2017.

Meanwhile, Palantir fell 12% and data storage firm SanDisk dropped 16%. The sell-off targeting SaaS stocks has also spread to several AI giants, with Meta down 6.6% this week and NVIDIA falling 8.9%.

Jack Ablin, chief investment strategist at Cresset Capital, said market reactions are bound to be severe given current valuation levels: "Expectations are very, very high right now."

Jonathan Corpina, senior managing partner at Meridian Equity Partners, also pointed out that given the lofty valuations of tech stocks, sector rotations are happening faster than in the past. "If you're trading in this market, you have to be in and out quickly because the pain can come pretty fast."

The pain has even spread beyond the stock market. Data from PitchBook LCD shows that as of Tuesday, the average price of software company loans has fallen to 91.27 cents on the dollar from 94.71 cents at the end of last year.

The additional yield (spread) investors demand to hold software loans jumped to 5.95 percentage points at the end of January. Additionally, about $25 billion of software loans are in distressed territory (trading below 80 cents on the dollar), accounting for nearly a third of all distressed loans.

## The Debate: AI Disruption vs. Overreaction

Market volatility reflects investors' reassessment of companies at risk of potential disruption from AI.

Toby Ogg, an analyst at JPMorgan Chase, said the software industry is currently in a "guilty until proven innocent" position. The fears stem from the rapid adoption of AI technology, and while its application is still in the early stages for many companies, software firms are seen as having the greatest exposure.

However, industry executives and some strategists believe the sell-off may have gone too far. NVIDIA CEO Jensen Huang warned at an event hosted by Cisco that the recent sell-off in software stocks has been overhyped.

"A whole bunch of software companies are under enormous stock price pressure simply because of this narrative that 'AI is going to replace them'—it's the most illogical thing in the world."

Baird's Antonelli echoed this view, arguing that businesses will not easily abandon large enterprise-grade software for "code written in someone's closet in Oakland." He added that markets tend to "shoot first and ask questions later" when it comes to expensive stocks.

## Accelerated Capital Rotation: From Tech Giants to Traditional Sectors

Despite the heavy losses for tech stocks, this is not a broad market meltdown but a clear shift in capital flows. Investors have continued a weeks-long trend of pulling money out of long-term winners such as chip stocks and large tech giants, and redirecting it to more traditional corners of the market.

On Wednesday, seven of the 11 S&P 500 sectors closed higher as capital poured into companies more directly tied to accelerating economic growth. The energy, materials and consumer staples sectors have all risen by at least 12% so far this year.

Notably, even as the S&P 500 closed down 0.5%, 92 stocks hit 52-week highs intraday—the highest number of single-day new highs since November 2024.

Tom Bruni, head of market and retail investor insights at social trading platform Stocktwits, commented that this rotation has already been underway, and this week's news has simply given the market a reason to really accelerate the trend.

## Risk Warning and Disclaimer

The market is risky, and investment requires prudence. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial conditions or needs of individual users. Users should assess whether any opinions, views or conclusions in this article are consistent with their specific circumstances. Any investment made based on this article shall be at the investor's own risk.