Software stocks enter bear market on AI disruption fear with ServiceNow plunging 12%

Software stocks on Thursday slid deeper into an ongoing intense sell-off this year as investors recoiled from the sector on growing fears that artificial intelligence could upend many firms’ business models.

The iShares Expanded Tech-Software Sector ETF (IGV) dropped about 5% in morning trading, on pace for its biggest one-day decline since last April during the tariff-triggered downturn. The fund is now down about 21% from its recent high, pushing the software industry into bear-market territory and underscoring how quickly sentiment has turned against one of Wall Street’s former favorite industries.

Month to date, IGV is down almost 14%, on pace for its worst month since October 2008 when the fund fell 23%.

“Good, but not good enough,” Morgan Stanley analysts said in a note of ServiceNow’s report. “In an environment of heightened investor skepticism on incumbent application vendors, stable growth, in line with expectations, likely falls short of shifting the narrative.”

The pressure has deepened across the sector as investors question whether AI competitors and automation tools could erode demand for traditional software licenses and workflows. Valuations once justified by steady subscription growth are being recast as investors assess the possibility that AI could permanently shrink long-term revenue potential.

Megacap Microsoft added to the pressure, sliding about 10% after reporting a slowdown in cloud growth for the fiscal second quarter, putting the stock on track for its steepest one-day drop since March 2020. The company also issued softer-than-expected guidance on operating margin for the fiscal third quarter.

Investor unease has been amplified by the rapid pace of AI development itself. Anthropic released Claude Opus 4.5 late last year, its third major model launch in just two months. The company said the model excels at coding, operating computers and assisting with complex enterprise tasks, with ideal users including professional software developers and knowledge workers such as financial analysts, consultants and accountants.

“It is a little embarrassing that in 10 days, Anthropic was able to invent, co-work, put it out and everybody … could look at it and go, ‘Wow, why isn’t Microsoft doing that? Why don’t I know about that?’ And that is a narrative they need to fix,” Ben Reitzes, head of technology research at Melius Research, said on CNBC’s “Squawk on the Street.” “I think patience is going to run thin on the Street.”

Also on Thursday, SAP slid as much as 14% after the German software giant reported weaker-than-expected growth in its cloud contract backlog for the fourth quarter. Current cloud backlog rose 16% to 21.1 billion euro (US$25.3 billion), falling short of expectations for about 26% growth, which UBS analysts called a “disappointment.”

ServiceNow CEO Bill McDermott sought to counter investor fears on the company’s earnings call Thursday, saying concerns that AI will displace software vendors are misplaced.

“The real payoff comes when trillions of tokens move beyond pilots to be embedded directly into the workflows where business decisions are made,” McDermott said. “ServiceNow is the gateway to this shift, serving as the semantic layer that makes AI ubiquitous in the enterprise.”

He added that because AI systems are probabilistic, companies still need workflow software to ensure consistent business outcomes.

— With assistance from CNBC’s Samantha Subin.