Software stocks entered a bear market this week, shedding $1 trillion in value after Anthropic released an AI tool for legal research that sparked investor fears about enterprise software displacement.
The iShares Expanded Tech-Software Sector ETF dropped 27% from its September 2025 peak, falling 2% Wednesday alone as the sell-off spread from legal software names to broader enterprise players. AppLovin fell 16%, Palantir 12%, Varonis 11%. Oracle, ServiceNow, Salesforce, and Snowflake all lack technical support levels after the rout.
The panic spread to semiconductors after Alphabet flagged increasing AI infrastructure spending and Qualcomm reported tepid earnings. Qualcomm dropped more than 7% intraday Wednesday, while the Nasdaq fell 2% for the second consecutive day. PayPal cratered 18% on poor results February 3.
Bank of America analysts called the selling "indiscriminate" and "overblown," drawing parallels to January 2025's DeepSeek-triggered panic. The firm argues chip valuations already price in conservative growth assumptions: semiconductor stocks trade near or below 1x price-to-earnings-growth ratios, compared to 1.5-2x for the S&P 500. They see entry points in Nvidia, Broadcom, and AMD.
Trivariate Research's Adam Parker says software stocks are now "guilty until proven innocent," requiring stronger earnings to regain investor confidence.
The real question is whether this reflects fundamental business risk or valuation reset. Enterprise software isn't facing extinction: companies still need CRM, analytics, and infrastructure management. But investors are reassessing which vendors can defend margins as AI tools commoditize basic features and customers demand proof of AI monetization beyond capex promises.
Notably, stocks trading down more than 50% from highs include Oracle, Varonis, CommVault, and Circle. These aren't speculative plays but established enterprise names, suggesting the market sees structural margin pressure ahead.
History suggests panic selling creates opportunities, but also that expensive tech stocks can stay expensive until earnings catch up. CTOs watching budget conversations know which one their CFO believes.