Software Stocks, AI Disruption, and the Importance of Diversification
The software industry has declined nearly -30% from its peak last October, one of the largest non-recessionary drawdowns in over 30 years.
For your convenience, we’ve also provided a PDF copy of the Chart of the Month | Software Stocks, AI Disruption, and the Importance of Diversification
The software industry has declined nearly -30% from its peak last October, one of the largest non-recessionary drawdowns in over 30 years. Figure 1 puts the decline in historical context alongside the other major software selloffs. The two largest drawdowns before the current one, the dot-com bust and the 2008 financial crisis, both occurred during recessions, when corporate earnings were declining and businesses were cutting spending.
The 2022 selloff, driven by the Federal Reserve’s aggressive rate-hiking cycle, was the first major non-recessionary decline and saw software stocks fall nearly -40%. The current drawdown, at nearly -30%, surpasses the COVID pandemic, but it’s driven by a fundamentally different catalyst: Artificial Intelligence.
The sell-off accelerated in January and February after a series of artificial intelligence (AI) product launches showed that general-purpose AI tools could perform tasks previously handled by specialized software at a lower cost. The market’s reaction was swift and sequential. Software stocks fell first, but concerns quickly spread to other industries, including financial data providers, commercial real estate services, and logistics companies. The sell-off reflected a shift in how investors view AI. For the past two years, AI has been seen as a productivity tool that would help existing companies do more with less. The January and February product launches crossed a threshold: investors started pricing AI as a potential replacement for entire categories of services, not just a tool to make companies more efficient.
By late February, the narrative around AI disruption began to cool and markets started to stabilize. Wall Street analysts pushed back on the worst-case scenarios, and the conversation shifted from AI would replace entire industries to a more focused debate about which industries are genuinely vulnerable and which will find ways to adapt and develop competitive advantages. Several of the hardest-hit stocks rebounded, and while the software industry partially recovered, it remains down more than -25%. The broader question of how AI will reshape the enterprise software industry is far from resolved, and its effects may continue to surface across the market as AI tools evolve.
The software industry’s sell-off is a reminder that even well-established businesses can experience rapid repricing when the market’s assumptions about future earnings change. However, Figure 2 shows the direct impact has been limited for diversified investors. International stocks and the average S&P 500 stock have both produced gains, while small-cap stocks, the broader S&P 500, and the Nasdaq 100 are each down low single digits. The takeaway: portfolio diversification across sectors and asset classes remains an effective way to manage the uncertainty that comes with rapidly changing environments and market volatility.
Disclosure
The information and opinions provided herein are provided as general market commentary only – not financial advice – and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.
See Full Disclosures Page
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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Chart of the Month | Software Stocks, AI Disruption, and the Importance of Diversification
Software Stocks, AI Disruption, and the Importance of Diversification
The software industry has declined nearly -30% from its peak last October, one of the largest non-recessionary drawdowns in over 30 years.
For your convenience, we’ve also provided a PDF copy of the Chart of the Month | Software Stocks, AI Disruption, and the Importance of Diversification
The software industry has declined nearly -30% from its peak last October, one of the largest non-recessionary drawdowns in over 30 years. Figure 1 puts the decline in historical context alongside the other major software selloffs. The two largest drawdowns before the current one, the dot-com bust and the 2008 financial crisis, both occurred during recessions, when corporate earnings were declining and businesses were cutting spending.
The 2022 selloff, driven by the Federal Reserve’s aggressive rate-hiking cycle, was the first major non-recessionary decline and saw software stocks fall nearly -40%. The current drawdown, at nearly -30%, surpasses the COVID pandemic, but it’s driven by a fundamentally different catalyst: Artificial Intelligence.
The sell-off accelerated in January and February after a series of artificial intelligence (AI) product launches showed that general-purpose AI tools could perform tasks previously handled by specialized software at a lower cost. The market’s reaction was swift and sequential. Software stocks fell first, but concerns quickly spread to other industries, including financial data providers, commercial real estate services, and logistics companies. The sell-off reflected a shift in how investors view AI. For the past two years, AI has been seen as a productivity tool that would help existing companies do more with less. The January and February product launches crossed a threshold: investors started pricing AI as a potential replacement for entire categories of services, not just a tool to make companies more efficient.
By late February, the narrative around AI disruption began to cool and markets started to stabilize. Wall Street analysts pushed back on the worst-case scenarios, and the conversation shifted from AI would replace entire industries to a more focused debate about which industries are genuinely vulnerable and which will find ways to adapt and develop competitive advantages. Several of the hardest-hit stocks rebounded, and while the software industry partially recovered, it remains down more than -25%. The broader question of how AI will reshape the enterprise software industry is far from resolved, and its effects may continue to surface across the market as AI tools evolve.
The software industry’s sell-off is a reminder that even well-established businesses can experience rapid repricing when the market’s assumptions about future earnings change. However, Figure 2 shows the direct impact has been limited for diversified investors. International stocks and the average S&P 500 stock have both produced gains, while small-cap stocks, the broader S&P 500, and the Nasdaq 100 are each down low single digits. The takeaway: portfolio diversification across sectors and asset classes remains an effective way to manage the uncertainty that comes with rapidly changing environments and market volatility.
Disclosure
The information and opinions provided herein are provided as general market commentary only – not financial advice – and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.
See Full Disclosures Page
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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