.png){kind=logo}
US software stocks declined sharply in early February, and the slide unsettled investors who were betting on the AI-related stocks. The impact spread across global markets and pushed software and services shares into their steepest drawdown since the 2022 rate-driven selloff.
The move followed growing concern that fast-improving AI tools could weaken parts of the traditional software business model. Investors also watched for signs that the market had started a broader rotation away from high-growth technology shares.
The latest wave of selling gathered pace after the launch of a new legal-focused tool tied to Anthropic’s Claude large language model. Market participants treated the product as a fresh test of how quickly AI can replace tasks that software subscriptions once monetized.
As a result, investors questioned whether software firms can keep compounding earnings at prior rates. This concern matters because many valuations rely on steady renewals and pricing power. Even after a broad rebound in the wider market, traders still flagged uncertainty around near-term demand and margins.
Software and services shares have trailed the broader US market by a wide margin. Over the past three months, the group lagged the S&P 500 by nearly 24 percentage points, which neared the worst gap in about three decades of data.
Several large-cap software stocks led the declines since the tech sector peaked on October 29, 2025. Oracle fell nearly 50% from October 29, 2025, to February 5, 2026. ServiceNow and AppLovin each dropped more than 40% over the same span. Gartner, Palantir, Intuit, Datadog, and Workday also declined during the sell-off.
Options markets continued to price large swings for software exposure. For the iShares Expanded Tech-Software Sector ETF (IGV), 30-day implied volatility stood near 41%, close to the 10-month high of 45% reached a day earlier. This reading suggested traders still expected sharp moves, even after a modest bounce.
Short positioning also stayed heavy. IGV short interest stood near 19% of free float, close to the highest level on record in the dataset cited. At the same time, the market rotation remained visible.
Since late October, the tech sector has fallen about 10%, while energy, materials, consumer staples, and industrials have each gained at least 10%. With tech still near one-third of the S&P 500’s weight, investors continued to watch whether weak software stocks can drag on broader index progress.
Also Read: US Stock Market Today: S&P 500 Rises as Semiconductors Lead Recovery and Bitcoin Bounces
