By Medha Singh and Saqib Iqbal Ahmed
Feb 5 (Reuters) – Shares of U.S. software and data services companies continued their slide on Thursday for a seventh straight session as investors worried that fast-advancing artificial intelligence tools could upend the sector.
The S&P 500 software and services index fell 4.6% after losing about $1 trillion in market value since Jan. 28, in a selloff dubbed “software mageddon.”
Some of the big tech names most affected by the rout included ServiceNow, which fell 7.6%, Salesforce, which fell 4.7%, and Microsoft, which fell 5%.
“I would classify this as a ‘sell everything’ mentality at this point,” said Dave Harrison Smith, chief investment officer and head of technology investing at asset management firm Bailard.
Canada-based Thomson Reuters, which suffered a record one-day decline earlier this week after investors raised concerns that a new plug-in from Anthropic’s Claude could disrupt its legal business, fell 5.6% despite raising its dividend and reporting fourth-quarter results largely in line with expectations.
The company, which owns legal database Westlaw and news agency Reuters, said it was seeing tangible benefits from AI investments.
“The uncertainty surrounding AI’s ultimate impact means that earnings results will be important signals of business resilience in the near term, but in many cases insufficient to counter long-term downside risk,” said Ben Snider, Goldman Sachs’ chief U.S. equity strategist.
That uncertainty has also kept dip buyers at bay.
“There has been no dip buying… but we are reaching an inflection point,” said Nick Giorgi, chief equity strategist at Alpine Macro.
On Thursday, the S&P 500 software and services index was trading about 21% below its 200-day moving average, the furthest the index has fallen below that key technical level since June 2022.
“We’re now talking about multi-decade excesses… in general, this is actually a pretty good starting point,” Giorgi said.
Bailard’s Smith said the sell-off likely created opportunities for stock pickers, but cautioned against expecting a quick recovery.
“It’s very challenging to hit the bottom during a sentiment crash like this,” he said.
ROTATION OUT OF TECH INTENSIVE
The software sell-off has been accompanied by a broader rotation from technology into value-oriented sectors such as consumer staples, energy and industrials, which lagged the bull market that began in October 2022.
“We’re seeing people in general reducing the risks of technology, and we’ve been seeing that since the beginning of the year,” said Andrew Wells, chief investment officer at SanJac Alpha in Houston.
Reflecting the bearish mood, short interest on mid-to-large software companies has risen over the past three months, according to data analytics firm Ortex, with cybersecurity and SaaS (Software as a Service) companies seeing the biggest jump in such bearish bets.
Data from Goldman Sachs shows that hedge funds’ exposure to software companies has declined sharply recently, although the funds continued to maintain net long positions in the sector.
“After years of tech-driven market leadership, the balance of power is shifting as investors focus on traditional ‘old economy’ sectors,” Angelo Kourkafas, senior global investment strategist at Edward Jones, said in a note.
UNLOCKING LEVERAGE POSITIONS INCREASES PRESSURE
The sell-off also spread to sectors exposed to software companies, such as asset managers, on concerns that they would lend through private credit.
Alternative asset manager Blue Owl, which was on track for its 11th straight session of declines, said in a post-earnings call that its total exposure to the software sector represents 8% of its assets under management.
The performance of foreign technology stocks was mixed. Shares of the London Stock Exchange Group finished 5.8% higher, while data analytics companies RELX rose 2.9% and Netherlands-based Wolters Kluwer gained 2%.
In contrast, India’s software exporter index, which includes names such as HCL Technologies and Wipro, fell 0.7%, a day after falling 6% in its worst session in almost six years.
VOLATILITY SPREADS ACROSS MARKETS
Market volatility has soared in stocks, commodities and digital assets in recent weeks, which market participants attribute to leveraged investors being forced to quickly unwind their positions.
Wall Street’s most watched gauge of investor anxiety, the Cboe Volatility Index, rose 3.13 points to close at 21.77, its highest close since Nov. 21.
Precious metals gold and silver resumed their decline on Thursday after a historic rout earlier this week, and bitcoin fell 13% to $62,890.
“This is a lot of relative bets going wrong, and then there’s some sort of reset going on in the internal market, but time will tell,” John Hardy, Saxo’s global head of macro strategy, said in a podcast.
(Reporting by Saqib Iqbal Ahmed in New York and Medha Singh in Bengaluru; additional reporting by Chibuike Oguh in New York, Vidya Ranganathan in London and Johann M Cherian in Bengaluru; Editing by Tasim Zahid, Shinjini Ganguli, Anil D’Silva, Nick Zieminski, Rod Nickel)
