Monday, February 16, 2026
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The market’s relationship with artificial intelligence has undergone a sharp reversal, morphing from enthusiastic embrace to anxious recalibration. Software stocks have suffered the largest non-recessionary 12-month drawdown in more than 30 years, with the sector losing $2 trillion of market capitalization from its peak, reducing its weight in the S&P 500 to 8.4% from 12%. LPL Financial closed 8.31% lower on February 10th after tumbling 11% in midday trading, while Charles Schwab fell 7.42% and Raymond James Financial lost 8.75%.
Software stocks were at the epicentre, plunging so much that the value of those tracked in an iShares ETF dropped almost $1 trillion over seven days. The trigger arrived when Altruist Corp unveiled an AI tax-planning tool and Anthropic released plugins for its Claude assistant targeting professional services. These announcements prompted immediate reassessment because they made tangible something investors had treated as theoretical: AI tools directly competing with high-margin services that command premium fees.
The carnage cascaded across sectors. Thomson Reuters reported Q4 numbers on February 5th expecting organic revenue growth of around 8% in 2026, alongside operating margin improvement of 100 basis points, yet Thomson Reuters Corporation was down 28% year-to-date as of February 11. By Thursday, the disruption narrative had spread to logistics, with C.H. Robinson and RXO plummeting 20% and 25% respectively following release of an AI freight tool.
The software sector’s forward P/E has dropped from 35x in late 2025 to about 20x, the lowest absolute level since 2014 and barely above the broader S&P 500. Markets fear that competitive moats have gotten shallower, making companies easier to replace with AI, whilst the range of outcomes has gotten wider, making it harder to assign fair valuations.
Yet the panic contains obvious analytical gaps. Financial advisors have offered automated options for over a decade, but robo-advice solutions achieved only 2-4% penetration, suggesting technology availability and adoption follow different timelines. Nvidia CEO Jensen Huang characterised fears about AI replacing enterprise software as “the most illogical thing in the world”, arguing AI will enhance existing tools rather than reinvent them.
Critically, there’s little fundamental evidence of deterioration. For CY 2026, analysts are projecting earnings growth of 14.1% and revenue growth of 7.3% for the S&P 500. Markets are repricing businesses whose forward earnings estimates have actually improved, suggesting emotional rather than analytical drivers dominate. JPMorgan strategists see potential for rebound based on “overly bearish outlook on AI disruption and solid fundamentals,” whilst Goldman Sachs CEO David Solomon said he thinks the selloff was “too broad”.
The business model implications require nuanced analysis. Seat-based pricing faces pressure as AI agents reduce headcount needs, but consumption-based pricing, outcome-based models and platform consolidation offer paths to capture value. Not all software companies face equal risk. Firms with deeply embedded workflows, proprietary data advantages, or mission-critical applications retain stronger defensive positions.
Hedge funds’ net exposure to software has fallen to fresh 5-year lows in 2025, having continued to rotate out of Software. Sophisticated institutional capital exited aggressively, leaving others holding positions through steep declines. Investors now hunt for the next domino to fall, creating self-reinforcing cycles where identifying vulnerable industries becomes more important than fundamental analysis.
The proper response combines conviction in quality businesses with humility about timing and narrative power. Companies with genuine competitive advantages, strong balance sheets and adaptable management deserve patience through volatility. Yet acknowledging that short-term price action can remain disconnected from fundamentals argues for position sizing that permits enduring drawdowns without forced selling.
The current moment tests whether investors can distinguish between genuine threats and temporary panic. AI will undoubtedly disrupt business models and reshape competitive dynamics. Whether this week’s selloff represents the beginning of that process or an emotional overreaction creating opportunity depends less on AI’s capabilities than on specific businesses, their defensive moats and their ability to adapt.
The investors who navigate this environment successfully will resist both extremes: neither dismissing AI disruption as irrelevant nor capitulating to narratives that every software business faces obsolescence. Markets reward differentiation, but only for those with the patience and diversification to endure periods when indiscriminate selling overwhelms careful analysis.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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