The AI investment story has shifted repeatedly over the past year. Investors first piled into semiconductor companies, then power producers, networking firms, and data center infrastructure providers as the race to build AI capacity accelerated.
Software companies, however, became the market’s biggest casualty after fears emerged that AI agents could replace many traditional software applications altogether. The result was one of the broadest selloffs the software sector has experienced in years. Yet markets have a habit of overshooting, and recent trading suggests investors are beginning to rethink whether the AI threat was ever quite as severe as first believed.
The AI Panic Went Too Far
The spark came at the end of January when Anthropic unveiled 11 new plug-ins for its Claude Cowork AI platform. The update expanded Claude’s ability to automate workflows across legal services, finance, marketing, and other white-collar professions. Investors immediately concluded that AI agents would bypass many software applications altogether.
The selling was relentless. Over just six trading days, software and IT services companies collectively lost nearly $1 trillion in market value as investors rushed toward AI infrastructure stocks instead. Many of the industry’s biggest names have since fallen 40% or more from their highs despite continuing to post healthy revenue growth and recurring subscription income.
The selling was remarkably indiscriminate. Companies serving different customers, industries, and use cases were lumped together under the assumption that AI would eventually replace them all.
Not Everyone Believed the SaaS-Pocalypse
While investors were fleeing the sector, some on Wall Street argued the market had become far too pessimistic.
JPMorgan published a list of software companies it believed were well-positioned to benefit from AI rather than be disrupted by it. The firm’s view was straightforward: companies with large customer bases, proprietary enterprise data, and established workflows were more likely to integrate AI than lose customers to it.
That view received an endorsement from Goldman Sachs CEO David Solomon, who said, “There’ll be winners and losers — plenty of companies will pivot and do just fine.”
AI will almost certainly reshape enterprise software, but disruption rarely affects every company equally. Some applications become obsolete. Others become more valuable by embedding AI directly into products customers already use every day.
The Rotation May Already Be Starting
Recent trading suggests investors are beginning to recognize that difference. Several software companies that endured some of the steepest declines have posted strong gains over the past few sessions. Shares of ServiceNow (NYSE:NOW | NOW Price Prediction), Salesforce (NYSE:CRM), and Adobe (NASDAQ:ADBE) have all risen 10% or more as investors rotated into some of the market’s biggest laggards.
At the same time, many AI infrastructure leaders — including networking, connectivity, and other AI bottleneck stocks that dominated in recent weeks — have stumbled as investors locked in profits after exceptional gains.
That doesn’t necessarily signal the end of the AI infrastructure trade. Demand for semiconductors, networking equipment, memory, and data centers remains supported by hundreds of billions of dollars in planned hyperscale capital spending over the next several years.
Instead, it may signal something healthier: investors are broadening their view of who benefits from AI.
Key Takeaway
In short, investors shouldn’t abandon the companies building AI’s infrastructure. Those businesses remain essential to the long-term expansion of artificial intelligence.
That said, markets rarely reward chasing yesterday’s biggest winners forever. Some of the highest-quality software companies now trade near multi-year valuation lows after losing 40% or more during the AI panic, despite continuing to grow revenue and generate substantial free cash flow.
Granted, not every SaaS company will emerge stronger. Some business models will struggle as AI agents become more capable. But others will use AI to deepen customer relationships, automate workflows, and expand their competitive advantages.
Ultimately, smart investors don’t have to choose between AI infrastructure and AI applications. Taking partial profits in stocks that have already delivered outsized gains while gradually accumulating well-positioned software leaders at discounted valuations could prove to be one of the better opportunities created by this year’s AI-driven volatility.
Top Gaining Stocks
Top Losing Stocks