Software stocks are quickly unraveling as investors reconsider AI winners, driving capital out of high-growth tech and back into value stocks and cyclical corners of the market.
In the past week alone, the sector – followed by the iShares Tech-Expanded Software Sector ETF (NYSE:IGV) – is down nearly 20%, pushing losses to more than 30% from late October highs.
The catalyst is not higher rates or weaker demand; it’s the growing fear that AI itself could disrupt the very companies once seen as its biggest beneficiaries.
This is what equity strategist Goldman Sachs writes in a note published on Friday Ben Snider said markets are undergoing a fundamental rotation, with investors rapidly exiting AI-exposed software names and reallocating capital to cyclical and value-linked sectors linked to the ‘real economy’.
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Software names, long considered the market’s most reliable growth drivers, are plagued by fears that generative AI models such as Anthropic’s Claude Cowork and Google’s Genie 3 could undermine core business models.
The sector’s price-to-earnings ratio has fallen from 35x at the end of 2025 to around 20x, the lowest absolute level since 2014 and barely above the broader S&P 500.
Snider noted that this decline marks the smallest valuation premium in the broader market since 2010. While the consensus still sees 15% revenue growth for the sector – more than double the S&P 500’s expected 6% – valuations now suggest the market doesn’t believe these numbers will hold.
“The drop in valuations implies a decline in revenue growth of roughly 10 percentage points over the medium term,” Goldman wrote.
Price-to-sales ratios also fell from 9x to 6x since September, but still at a 260% premium to the S&P 500. Net profit margins remain at 20-year highs, but investor positioning signals further pain. Hedge funds have recently reduced their exposure, although they remain net long.
Meanwhile, large-cap mutual funds have been underweight software since mid-2025.
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While software and data-intensive sectors such as media and business services tumbled, value and cyclical stocks soared higher.
Goldman’s value factor rose 7% in a week, while a basket tied to the U.S. industrial cycle rose 13% — a sharp contrast to continued weakness in software and other data-intensive sectors.
Consumer goods and the financial sector also rose strongly, with technical factors such as high short-term interest rates further fueling the economy.
The best performing stock sectors of the week were led by the SPDR S&P Regional Banking etf (nyse:Kre)an increase of 5%, followed by the iShares US Housing ETF (NYSE:ITB)an increase of 4.5%, and the US Global JETS ETF (NYSE:JETS)an increase of 4%.
Snider noted that cyclical names now appear insulated from AI risk – not because they will benefit from AI, but because their business models are less exposed to the displacement of automation.
That’s a sharp reversal from last year’s market logic, when investors hunted for names with AI benefits. Today they are looking for AI safety.
“While the volatility of recent moves appears to be exacerbated by technical factors, we continue to recommend value as a factor and select cyclical sectors of the U.S. stock market,” Snider said.
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Goldman Sachs pointed to past disruption cycles, noting that sectors such as newspapers in the early 2000s and tobacco in the late 1990s only reached sustainable lows when earnings expectations stabilized.
With AI’s long-term impact still uncertain, solid short-term results may not be enough to restore confidence in software names.
Still, Goldman emphasized that this isn’t a wholesale exit call for software: Select groups, especially vertical software and companies with proprietary data advantages, could hold up better than the broader group.
However, the broader signal from the markets is unmistakable: Investors are no longer willing to pay for growth stories alone, as capital shifts to value, cyclical and old economy companies that offer tangible assets, short-term cash flow and protection against disruption risks.
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This article From AI Darlings to the old economy? Why Investors Are Fleeing Software and Pursuing Value Stocks originally appeared on Benzinga.com
