So, what happened?
In the first week of February 2026, software stocks took a noticeable hit.
Big names, across cloud, SaaS, and application software, sold off together; even as many of these companies continue to report solid earnings and revenue growth. The dominant explanation moving through markets and the press was simple: artificial intelligence.
Not because AI is failing. Because investors are suddenly questioning what AI could replace.
The concern is that AI tools may reduce the need for traditional software products, shrink seat-based licensing models, and compress margins over time. Whether that plays out fully or not, the market reacted first, asking questions later.
That reaction could resonate for a long time.
Why Software Led the Selloff
This was not a random pullback.
Software stocks entered the year trading at elevated valuation multiples, after a strong run driven by optimism around digital transformation and AI adoption. Then, some might say, the dog caught the car. New AI tools started demonstrating real automation capabilities, and investors began reassessing the pricing power and demand of software companies long term.
The result was a rapid shift in expectations. Even companies posting decent results were sold.
This tells us that the collective move was driven more by multiple compression than by collapsing fundamentals.
In other words, investors were not necessarily saying these businesses are broken. Instead, they were saying: future growth may not deserve the same premium.
That distinction matters.
Valuation Compression Versus Business Performance
One of the hardest lessons for investors to learn is that a good company does not always make a good stock. Software is a perfect example.
Many software companies are still growing revenue. Many, in fact, are quite profitable. But markets price stocks based on what they believe comes next, not what already happened. When fear enters the picture, valuation multiples contract.
Price-to-earnings and price-to-sales ratios fall. And once those multiples reset lower, stocks often struggle to return to prior highs, even if earnings remain stable.
That is what investors are grappling with right now. The fear is not that software companies disappear overnight: the fear is that AI permanently changes how much investors are willing to pay for their future growth.
A Tale of Two Businesses
Let’s look at an example. Shopify and Palantir are two very different companies, but both were caught in the same wave.
Shopify has been one of the most popular growth stocks of the past decade. Its platform continues to expand, and the company is actively integrating AI into its tools for merchants and developers. Yet the stock pulled back sharply as investors questioned how much AI could commoditize parts of e-commerce infrastructure.
Palantir, a Saas company that focuses on data analytics and enterprise software, has also posted improving financials, to put it lightly. In Q4 of 2025 they grew 70% year-over-year, due in part to a client list that includes much of the U.S. government, many governmental agencies abroad, and a good slice of the healthcare industry. Still, its shares dropped alongside the broader software group.
These moves highlight something important. Markets were not sorting winners and losers — they were repricing the entire category.
This was structural, not company specific.
Is the Fear Real?
Yes. And no.
AI clearly has the potential to automate meaningful portions of what traditional software companies provide today. Anyone who has spent time using modern AI tools can see how quickly they perform tasks that once required dedicated platforms.
At the same time, enterprise software is deeply embedded. Businesses do not replace core systems overnight. Contracts, integrations, compliance, and workflow dependencies create friction that slows disruption.
So, the reality likely sits somewhere in the middle. AI will reshape software, but that process will take time. Markets, however, do not wait for certainty.
They price risk immediately.
Supply and Demand: Why Prices May Stay Down Longer Than Expected
Stock prices move based on buying pressure.
Right now, many investors are hesitant to add exposure to software. Even those who believe in the long-term story are waiting for clarity.
That creates a simple dynamic:
- Fewer buyers
- Plenty of sellers
- Lower prices
It doesn’t matter how good a company looks on paper if demand for the stock dries up, which is why rebounds can often take longer than expected. Recovery requires renewed conviction, not just stable earnings.
Where Capital Is Moving Instead
While software sold off, capital has been flowing toward areas seen as direct beneficiaries of AI:
- Semiconductor companies powering AI workloads
- Infrastructure providers
- Select cloud platforms
Nvidia is the most obvious example, but broader AI infrastructure has attracted steady interest.
Even large platforms like Amazon and Microsoft, through AWS and Azure, remain critical to AI deployment. That said, we are treading more carefully here as well. These businesses are strong, but expectations remain high, and spending cycles are evolving.
Outside of tech, investors are also rotating into:
- Industrials
- Select financials
- Companies tied to physical products and services
These are areas that feel less exposed to immediate AI disruption.
What This Means for Investors Right Now
We believe caution is warranted.
Software stocks may continue to generate earnings, but lower valuation multiples could limit upside for a long time. Some names will recover. Others may never revisit their highs. Trying to pick the eventual winners is a fool’s errand, especially since it’s often unclear how exactly each platform competes with, or monetizes, AI.
For now, we are reducing exposure to software where disruption risk feels highest, focusing instead on areas with clearer demand visibility. We are also building exit strategies rather than holding through uncertainty.
This does not mean abandoning tech entirely.
It means being selective.
Final Thoughts
This is one of the most disruptive periods markets have seen in recent memory. AI is not just another product cycle; it has the potential to reshape entire industries, including software itself.
That does not mean panic is the right response. What it does mean is that valuations matter again, and narratives alone are no longer enough. Some software companies will adapt and thrive. Others will struggle under lower multiples and fading investor confidence.
Navigating this environment requires discipline, flexibility, and a clear understanding of where real demand still exists.
Ready to Reposition Your Portfolio?
Disruption creates both risk and opportunity. If you’re unsure about your exposure, or need help evaluating risks, contact Michael Leslie Investments today. We can help you build a portfolio and strategy grounded in fundamentals, not headlines.
