The global software industry is living through a paradox. Inside companies, executives and engineers describe an era of unprecedented technological acceleration, driven by rapid advances in artificial intelligence. Outside, in public markets, investors are treating much of the sector as collateral damage in an AI arms race dominated by model builders and infrastructure giants. The result is a sharp disconnect between operational reality and stock performance, with software shares sliding even as product capability, customer demand, and long-term relevance appear to be strengthening.

This tension explains why leaders across enterprise software describe the current period as the most exciting moment in decades, even as valuations compress and sentiment turns defensive. Far from signalling decline, the market’s anxiety reflects uncertainty over how value will be redistributed as AI reshapes workflows, economics, and competitive boundaries.

Why AI Fear Is Driving a Broad Software Selloff

The recent selloff in software stocks has been less about earnings deterioration and more about narrative risk. Investors are increasingly worried that autonomous AI agents and generative tools will disintermediate traditional software applications by allowing companies to build custom solutions internally, bypassing vendors altogether.

This fear has been amplified by dramatic demonstrations of AI systems that can write code, generate marketing campaigns, draft legal documents, and automate customer interactions. The implication, at least in market psychology, is that horizontal software platforms could be hollowed out as AI becomes the interface and the logic layer simultaneously.

As a result, investors have rotated capital away from application software and toward companies seen as owning the “picks and shovels” of the AI era: chipmakers, cloud infrastructure providers, and frontier model developers. Exchange-traded funds focused on cloud and software have fallen sharply, dragging down companies with otherwise stable growth profiles.

The selloff has been indiscriminate. Firms with very different business models, customer bases, and margins have been grouped together under the assumption that AI represents an existential threat to all of them.

Inside the Industry, a Very Different Picture

Within software companies, the mood is strikingly different. Executives argue that the fear misunderstands how enterprises actually adopt technology. While AI tools can generate impressive outputs, deploying them securely, reliably, and at scale inside large organisations remains complex and risky.

This is where established software vendors retain an advantage. They already manage data governance, compliance, uptime guarantees, and integration with existing systems. Rather than being replaced by AI, many see themselves as the natural distribution layer through which AI becomes usable in real-world business settings.

Leaders at companies like **Box**, **Salesforce**, and **ServiceNow** argue that enterprises do not want to become software developers or AI operators. They want outcomes, accountability, and support. AI increases the value of platforms that already sit at the centre of business processes, rather than eliminating them.

This view helps explain the “cognitive dissonance” executives describe: unprecedented customer interest and product momentum on one side, collapsing stock prices on the other.

AI as an Accelerator, Not a Substitute

A critical misunderstanding in the market narrative is the idea that AI replaces software rather than reshaping it. In practice, AI functions as an accelerator layered on top of existing platforms. Customer relationship management systems, document repositories, workflow engines, and collaboration tools become more powerful when infused with AI-driven automation and intelligence.

Rather than shrinking software budgets, many enterprises are reallocating spending within them. They are demanding tools that integrate AI seamlessly, reduce manual work, and deliver measurable productivity gains. Vendors that can embed AI deeply into their products stand to increase switching costs and expand wallet share.

This is already visible in enterprise buying behaviour. Despite headlines about disruption, there is little evidence of mass cancellations or seat reductions driven by AI. Instead, buyers are asking incumbents how quickly they can deliver AI-enhanced features, not whether they can be replaced entirely.

The Role of AI Agents and Open Models in Market Anxiety

Recent advances by AI developers, particularly around autonomous agents and open-source productivity tools, have intensified investor concern. The release of systems that can perform multi-step tasks across legal, financial, marketing, and engineering domains has raised questions about how much functionality can be commoditised.

For markets, the leap from “AI enhances software” to “AI makes software obsolete” is an easy one to make, especially when valuations are already elevated and risk appetite is fragile. Yet history suggests that new computing layers rarely eliminate incumbents outright. Instead, they force consolidation, differentiation, and strategic repositioning.

The internet did not kill enterprise software; it reshaped it. Mobile computing did not destroy productivity platforms; it expanded their reach. Cloud computing did not eliminate vendors; it changed how they priced and delivered value. AI appears to be following a similar pattern, albeit at a faster pace.

Why Stocks Are Falling Even as Fundamentals Hold

The sharp decline in software shares reflects valuation compression rather than collapsing fundamentals. Many companies continue to report steady revenue growth, high renewal rates, and improving margins. What has changed is the multiple investors are willing to pay amid uncertainty over future moats.

Public markets are forward-looking but not always nuanced. In the absence of clear frameworks for valuing AI integration, investors have chosen caution, discounting software stocks until winners and losers become more obvious. This has created situations where businesses with strong cash flows and competitive positions are trading at levels that assume long-term erosion.

Some analysts argue this creates opportunity rather than danger. On-the-ground checks with customers and partners often show little evidence of imminent displacement. Instead, enterprises appear cautious but committed, waiting to see how AI-enhanced software evolves before making drastic changes.

The Strategic Imperative for Software Companies

While executives dismiss the most extreme fears, they do not deny the pressure AI introduces. The current moment forces every software company to adapt faster than before. Standing still is no longer an option. Products must become more intelligent, more automated, and more tightly integrated with customer workflows.

This pressure is ultimately healthy. It accelerates innovation, raises customer expectations, and rewards companies that execute well. Incumbents with deep customer relationships and domain expertise are often best positioned to do this, provided they invest aggressively and avoid complacency.

In this sense, the “most exciting moment” narrative reflects reality. AI is expanding what software can do, not shrinking its relevance. The companies that succeed will be those that treat AI as a core capability rather than a bolt-on feature.

Infrastructure Winners, Application Survivors

Markets have so far drawn a sharp line between perceived AI winners and losers. Infrastructure providers and model developers are seen as capturing the bulk of value, while application software is viewed as vulnerable. Over time, this binary framing is likely to soften.

As AI matures, value tends to migrate closer to the user. Enterprises care less about who trained the model and more about who delivers reliable, secure, and compliant outcomes. That shift favours software platforms embedded in daily operations.

The current selloff, then, may reflect a timing mismatch rather than a structural decline. Infrastructure captures early excitement; applications capture durable value.

The turmoil in software stocks is real, but it is not a verdict on the industry’s future. It is a reset driven by uncertainty over how AI reshapes competitive advantage and profit pools. Inside companies, innovation is accelerating, not stalling. Customers are experimenting, not abandoning.

If anything, the pressure from AI is forcing software to justify its value more clearly than ever. For vendors that succeed, the result may be stronger products, deeper customer relationships, and more defensible businesses.

In that context, the gap between market fear and operational optimism may eventually close. When it does, the current period is likely to be remembered less as the moment software was disrupted, and more as the moment it was fundamentally upgraded.

(Adapted from CNBC.com)