Software Sector Stocks Lose Momentum as AI Reshapes Investor Bets in 2025

• Why Are Traditional Software Stocks Struggling?
• Which Software Companies Are Defying the Downturn?
• How Widespread Is This Software Sector Strain?
• What Do Valuation Trends Reveal?
• How Has the Software Sector’s Market Share Evolved?
• What’s Next for Software Investors?
• Frequently Asked Questions

The software industry, once Wall Street’s darling, is facing a reckoning as artificial intelligence disrupts traditional investment strategies. Giants like Salesforce, Adobe, and ServiceNow have seen their shares plummet by at least 16% this year, erasing nearly $160 billion in combined market value. Meanwhile, AI-focused players like Microsoft, Oracle, and Palantir are thriving. This divergence highlights how AI is rewriting the rules of the game—and investors are scrambling to adapt.

Why Are Traditional Software Stocks Struggling?

Salesforce Inc., Adobe Inc., and ServiceNow Inc. have become the S&P 500’s weakest performers in 2025, with each losing over 16% of their value. Investors have pulled funds from software and services for two consecutive months through June, a stark reversal from the sector’s 18-month winning streak. "Technological obsolescence can come out of nowhere," warns Robert Ruggirello, CIO at Brave Eagle Wealth Management. "There’s good reason for caution—AI is reshaping entire business models overnight."

Which Software Companies Are Defying the Downturn?

Not all software stocks are suffering. Microsoft Corp., Oracle Corp., and Palantir Technologies Inc. rank among the S&P 500’s top performers this year. Their secret? Aggressive AI adoption rather than clinging to legacy products. Meta Platforms Inc. has boosted ad revenue through AI-driven targeting, while Palantir’s AI solutions are projected to drive 45% sales growth. Cybersecurity firms like CrowdStrike Holdings Inc. also thrive, as AI complements rather than replaces their core offerings.

How Widespread Is This Software Sector Strain?

The slump isn’t confined to U.S. markets. Europe’s SAP SE has stumbled alongside smaller peers like Sage Group Plc and Dassault Systèmes SE following Monday.com’s profit warning. ChatGPT’s explosive growth—now boasting 700 million weekly users—has intensified competition. Ruggirello likens traditional software providers to "an energy company waking up to find Exxon-sized competitors on their turf."

What Do Valuation Trends Reveal?

Morgan Stanley’s software basket now trades at 23x forward earnings—half its 10-year average and the lowest since 2014 (Bloomberg data). By comparison, the Nasdaq 100 trades at nearly 27x. Some see opportunity in this correction. UBS strategists recently noted that beaten-down internet and software stocks could rebound as AI monetization improves. "While AI revenue hasn’t matched sector spending yet, adoption trends are encouraging," wrote Ulrike Hoffmann-Burchardi, UBS’s Americas CIO.

How Has the Software Sector’s Market Share Evolved?

Before 2021’s peak, no S&P 500 sector grew faster than software and services—expanding from under 6% to nearly 14.5% of the index. Even after tech giants were reclassified in 2018, the group held strong. Today, its 12% weighting trails semiconductors, fueled by AI hardware demand. Without Microsoft, Oracle, and Palantir’s outperformance, the sector’s position WOULD be weaker still.

What’s Next for Software Investors?

"Risk has undeniably increased, and visibility remains low," cautions Ruggirello. "While Meta and Microsoft continue executing, many peers face existential questions." As AI reshapes the competitive landscape, investors must distinguish between disruptors and dinosaurs—a challenge requiring both patience and precision.

Frequently Asked Questions

Which software stocks have performed worst in 2025?

Salesforce, Adobe, and ServiceNow lead the declines, each down over 16% year-to-date.

Are any software companies benefiting from AI?

Yes—Microsoft, Oracle, and Palantir have outperformed by integrating AI into their Core businesses.

How have software sector valuations changed?

Forward P/E ratios have halved from historical averages, reaching their lowest level since 2014.

Is this downturn specific to U.S. companies?

No—European firms like SAP have also struggled as AI competition intensifies globally.

What’s driving cybersecurity stocks’ resilience?

AI enhances rather than replaces security solutions, making firms like CrowdStrike less vulnerable to disruption.