U.S. Software stocks are facing sustained pressure as investors grapple with the potential for disruption from rapidly advancing artificial intelligence tools. The sell-off, which began several weeks ago, continued into Thursday, marking the seventh consecutive session of declines for companies in the sector. The anxieties extend beyond publicly traded software firms, impacting private credit markets with significant exposure to the industry.
Shares of companies like Blue Owl, TPG, Ares Management, and KKR have all experienced double-digit percentage drops this week, while Apollo Global and BlackRock have also seen declines, albeit smaller at 7% and 5% respectively. This broad-based weakness reflects a growing concern that AI could erode the future growth and profit margins of software companies, as businesses increasingly leverage tools like Anthropic’s Claude Code to develop software in-house.
The iShares Software ETF has fallen 20% year-to-date, with a further 5% decline recorded on Tuesday alone. This downturn is fueled by the prospect that AI will not simply augment software development, but fundamentally alter the landscape, potentially reducing the demand for traditional software products and services.
The impact isn’t limited to equity markets. The private credit sector is also feeling the strain, with an estimated 25% to 35% of the market exposed to the risk of AI disruption, according to UBS analysts. Software specifically accounts for approximately 20 percent of outstanding loans for private-direct lenders. This represents a significantly higher concentration than in the broader high yield corporate bond market, where technology exposure is only around 8%, indicating a greater diversification of risk.
Alternative asset managers are facing a dual challenge. Their private equity arms could see valuations of software holdings decline, potentially reducing future returns. Simultaneously, their private credit divisions are vulnerable to redemptions and, in a worst-case scenario, defaults as borrowers in the software industry face increased financial pressure.
UBS estimates that default rates could rise to 13% for private credit firms in the U.S. If AI triggers substantial disruption. This compares to a projected default rate of 4% for high yield bonds, highlighting the heightened risk within the private credit market.
The current anxieties build upon existing concerns about a potential AI bubble. While tech giants like Amazon, Meta, Alphabet, Microsoft, and Oracle are investing heavily in AI ventures, questions are emerging about the sustainability of these investments and their ability to generate returns. The capital-intensive nature of AI infrastructure – requiring massive data centers, specialized chips, and substantial electricity – is raising eyebrows among investors.
The development of generative AI, while promising, is described as potentially “the most wasteful use of a computer ever devised.” The computational demands of AI are significantly higher than traditional computing tasks, requiring exponentially more resources to achieve even simple results. This raises concerns about the long-term economic viability of AI projects and the potential for overinvestment.
The recent market turbulence underscores the growing recognition that AI is not merely a technological advancement, but a potentially disruptive force with far-reaching economic consequences. Investors are reassessing valuations and risk profiles across the technology sector, and the ripple effects are being felt in related markets like private credit. The question now is whether the current sell-off represents a temporary correction or the beginning of a more prolonged period of uncertainty.
The scale of investment in AI is substantial, with approximately $660 billion allocated globally. However, investors are increasingly questioning whether these investments will ultimately deliver adequate returns, adding to the downward pressure on software and related stocks. The situation demands careful monitoring as the implications of AI disruption continue to unfold.
