Mike Isaac, Joe Rennison and Maureen Farrell
A washout in the stocks of software companies has been flowing through Wall Street this week, as investors realised the threat that artificial intelligence will displace businesses had arrived.
While the prospect of AI disruptions has hung over the economy for years, a new set of tools released this week by a San Francisco start-up forced a sudden reckoning on Wall Street.
Software companies most at risk from the new tools were the hardest hit, as well as the investment funds that lend to these companies. But the sell-off helped push down the broader market. On Thursday, the S&P 500 turned negative for the year after falling on six of the past seven days. But it rebounded the next day, rising 1.5 per cent.
AI has been like rocket fuel for stocks, driving prices to record highs in recent years. Since October, though, that exuberance has been fading, as some realities of this transformative technology have begun to sink in.
Not only are investors growing worried that AI could render certain businesses obsolete, they are also questioning the growing piles of money that companies are spending on AI. On Thursday, investors were spooked by Amazon’s revelation that it planned to spend $US200 billion ($285 billion) on AI and other large investments this year, exceeding analysts’ predictions by $US50 billion; shares fell 7 per cent on Friday.
Last week, Google’s parent Alphabet said it would spend as much as $US185 billion this year, and last week Meta said its capital expenses, in large part to support AI, could reach $US135 billion.
In the software sector, the catalyst for the sell-off was the release on Tuesday by San Francisco-based artificial intelligence firm Anthropic of free plug-in software tools that allow companies to automate functions like customer support and legal services.
Because they were created as “open source” software, any company can download the tools without paying for them. These plug-ins could replace the tools that companies currently sell to businesses.
Another area vulnerable to AI are providers of software-as-a-service, or SaaS, a mode of delivering subscription-based computer programs over the internet instead of buying and installing them locally on one’s computer. New, free software models from AI companies have the potential to replace not only the SaaS business model but also much of the workforce behind it.
“There have been a number of these big sell-offs of these SaaS stocks over the past few years as these software models have rolled out,” Open AI CEO Sam Altman said in an interview with TBPN, a tech-focused streaming show. “I expect there will be more.”
Analysts have taken to calling the broad sell-off the “SaaSpocalypse”.
Shares of companies like LegalZoom, LexisNexis and Thomson Reuters, which offer legal services and research, dropped as much as 20 per cent over the past week. They had mixed recoveries after their drop.
Shares of Salesforce, which produces SaaS and customer relationship management software for sales workers, have fallen 25 per cent over the past month.
Even companies catering to the arts have been hit. Shares in Adobe and Figma, which produce tools for artists, fell 9 per cent and 17 per cent over the past week, driven by fears that many of the bread-and-butter design tools they provide to creative workers could eventually be automated.
The fervour for AI is not just affecting the software industry. The surge in AI spending has generated enormous demand for random-access memory, or RAM, a kind of chip required to produce the AI hardware built by these companies.
On Wednesday, Qualcomm, which makes microprocessors for smartphones and computers that require RAM, said it faced uncertainty around how much demand it would have for its chips over the next two years. That is, in part, because the skyrocketing cost of memory could dampen consumer demand for new devices. Shares of Qualcomm are down about 20 per cent this year.
Software companies have also been a favourite target of lenders of private credit, because the companies’ subscription-based business model provides a stable stream of income to support taking on more debt.
Private credit deals, as the name suggests, are not public, but the loans held by related business development companies, or BDCs, are seen as a proxy for the industry.
Roughly half the software debt held by BDCs, equal to about $US45 billion, comes due in 2030 or later, according to analysts at Barclays, raising worries about the length of time until these loans are repaid. The more time a borrower has to repay a loan, the more time there is for the borrower to default — or, in this case, the more time for a business to be displaced by AI.
An exchange-traded fund run by VanEck that contains holdings in many of the major BDCs is down about 6 per cent this year and more than 20 per cent over the past 12 months.
Even as Ares Management and Blue Owl Capital — two of the largest private-credit firms — reported results that Wall Street analysts largely applauded, the two companies couldn’t escape investors’ worries about AI disruption. Shares of Ares have fallen more than 20 per cent this year and Blue Owl’s have fallen over 16 per cent.
On an analyst call Thursday, Blue Owl CEO Marc Lipschultz denied that AI posed a threat to its lending business.
“We don’t have red flags, and, point of fact, we don’t have yellow flags. We actually have largely green flags,” Lipschultz said.
Blue Owl chief financial officer Alan Kirshenbaum attributed the company’s challenges to “headwinds in private credit, AI, software”, as well as investors who want some of their money back.
Analysts could find little to worry about in the firm’s results.
“If you took the name off the top of the release and ripped through the details, you’d think that’s a pretty darn good quarter,” Evercore ISI analyst Glenn Schorr wrote in a note late last week.
Bitcoin, a retail-dominated market that tends to swing with some of the popular stock trades, also skidded, sliding as low as $US60,000, its lowest level since October 2024, before rising back towards $US70,000.
On Wednesday, US Treasury Secretary Scott Bessent said during a congressional hearing that the government had no power to order banks to buy bitcoin in order to stem the price decline.
As investors dial down their exposure to the more speculative bets like bitcoin and AI-related stocks, they are shifting towards previously unloved sectors that are seen as better insulated through periods of volatility.
So far this year, energy stocks, consumer staples and the materials sector have all gained over 10 per cent while tech has languished.
“After years of tech-driven market leadership, the balance of power is shifting as investors rotate toward traditional ‘old economy’ sectors,” said Angelo Kourkafas, a strategist at fund manager Edward Jones.
