Old favorite software stocks take beating as fear of AI's impact grows

NEW YORK – A seismic shift rattled Wall Street this past week as investors, gripped by a growing fear of artificial intelligence's disruptive power, aggressively dumped the very software stocks that have defined market leadership for a decade. The brutal sell-off signals a potential changing of the guard, as capital rotates from the titans of Silicon Valley to the stalwarts of the industrial economy.

The week of Feb. 2, 2026, saw a dramatic repricing of risk across the technology landscape. Once unassailable giants like Microsoft, Salesforce, and Adobe faced intense selling pressure, not because of poor performance, but because of a dawning realization: the next generation of generative AI may not just augment their products, but replace them entirely.

This tech rout stood in stark contrast to the broader market. The Dow Jones Industrial Average, with its heavy weighting toward industrial, financial, and healthcare companies, climbed to new record highs, underscoring a fundamental divergence in investor sentiment.

The Great Tech Unraveling

The pain in the software sector was acute and widespread. The iShares Expanded Tech-Software Sector ETF (IGV), a key benchmark for the industry, plummeted nearly 20% for the week ending Feb. 6. It was one of the worst weekly performances for the fund since the deep tech rout of 2022, wiping out billions in market capitalization.

The sell-off was driven by a crisis of confidence in the long-term viability of traditional software-as-a-service (SaaS) business models in the face of advanced AI.

• Key Market Action: The Nasdaq 100, a proxy for large-cap tech, was dramatically outperformed by the blue-chip Dow for seven consecutive sessions. This marks the longest such streak in nearly four years and highlights a clear rotation away from growth-oriented technology and toward value and cyclical stocks.

The Cannibalization Conundrum

The primary fear haunting investors is that of "cannibalization." Emerging and increasingly sophisticated AI platforms, such as Anthropic’s "Claude Cowork" and Google’s "Genie 3," are no longer seen as simple tools but as potential competitors that could erode the core businesses of established software leaders.

Investors are questioning if a company needs a complex CRM subscription from Salesforce if an AI can manage customer interactions, analyze sales data, and generate reports from a simple prompt. Likewise, Adobe's creative suite faces a threat from AI models that can generate professional-grade images, videos, and web designs in seconds.

This anxiety was so profound that it overshadowed even strong financial results.

• The Earnings Paradox: Both Alphabet (Google's parent company) and Amazon reported robust quarterly earnings. However, their shares fell sharply as investors fixated on a different metric: soaring capital expenditures. The immense cost of building out the infrastructure needed to power their AI ambitions is raising concerns about shrinking profit margins and diminished shareholder returns in the near-to-medium term.

A Tale of Two Markets: "Long Detroit, Short Davos"

The market action paints a clear picture of a rotation from the digital to the physical economy. As Silicon Valley faltered, "Main Street" businesses thrived. This sentiment was perfectly captured by Bank of America’s Chief Investment Strategist, Michael Hartnett.

In a widely circulated note, Hartnett advised clients to go “Long Detroit, Short Davos,” a pithy summary of the prevailing strategy: favor tangible, U.S.-centric cyclical industries over globalist, intangible tech giants.

• The Rotation Defined: Investors are moving capital out of high-valuation software and internet stocks and into sectors like manufacturing, energy, and consumer staples. These businesses, perceived as having more resilient demand and defensible business models in the current environment, are now seen as the new safe havens.

The Human Cost of Disruption

The pivot away from legacy tech is not just a financial story; it has a significant human dimension. New data on the labor market shows that AI is no longer a theoretical threat to jobs but a concrete driver of layoffs.

According to a report from executive outplacement firm Challenger, Gray & Christmas, the impact of AI on the workforce is accelerating.

• Labor Market Impact: U.S. employers announced 108,435 job cuts in January 2026, a staggering 205% increase from the previous month. Of those, AI was cited as the reason for 7,624 layoffs. This 7% share represents the highest monthly proportion attributed to AI since the firm began tracking the figure in mid-2023. Since that time, nearly 80,000 job cuts have been directly linked to the technology.

The Broader Economic Picture

Paradoxically, as tech investors panicked, the American consumer appeared to be breathing a sigh of relief. The macro-economic backdrop provided an odd counterpoint to the sector-specific turmoil.

• Inflation Fears Easing: The University of Michigan’s preliminary February survey revealed that one-year consumer inflation expectations fell to 3.5%. This is the lowest reading since January 2025, a period that coincided with President Donald Trump’s second inauguration, suggesting that broader economic anxieties may be receding even as technological disruption accelerates.

The Path Forward

The events of the past week mark a critical inflection point for investors. The long-held belief in the unshakeable dominance of software is being fundamentally challenged. The new narrative is clear: if software was eating the world, AI now appears to be eating software.

Key questions now dominate boardroom and trading floor discussions:

1. Adaptation or Obsolescence? Can legacy software companies integrate AI deeply enough and fast enough to defend their moats, or will they be outmaneuvered by more agile, AI-native upstarts?
2. The Price of Innovation: Will the massive capital investment in AI infrastructure eventually lead to a new wave of hyper-growth and profitability, or is it a black hole for capital that will permanently compress tech margins?
3. A Panic or a Paradigm? Is this sell-off a temporary, fear-driven correction, or does it represent a permanent re-rating of the entire technology sector and the dawn of a new market regime led by value and tangible assets?

For now, the verdict on Wall Street is leaning toward the latter. The era of easy gains from software stocks appears to be over, replaced by a more complex and uncertain landscape where the disruptors themselves now face the threat of disruption.