Why Software Stocks Are Losing Ground in 2025 as AI Reshapes Investor Strategies

• How Badly Have Traditional Software Stocks Performed in 2025?
• Which Software Companies Are Actually Thriving in the AI Era?
• Is This Just a U.S. Phenomenon or a Global Trend?
• What Do the Sector Weightings Tell Us About This Shift?
• Are There Buying Opportunities in the Software Selloff?
• How Is AI Changing the Software Investment Thesis?
• What Historical Parallels Can We Draw From This Shift?
• How Should Investors Approach Software Stocks Now?
• Frequently Asked Questions

Wall Street's love affair with software stocks is cooling off faster than a forgotten cup of coffee as artificial intelligence reshapes the tech investment landscape. While some traditional software giants like Salesforce and Adobe have seen their market value evaporate, AI-forward companies like Microsoft and Palantir are thriving. This divergence creates both risks and opportunities for investors navigating one of the most significant tech shifts since the dot-com era. Let's dive into what's driving these seismic changes and where smart money might be heading next.

How Badly Have Traditional Software Stocks Performed in 2025?

The numbers tell a sobering story. Salesforce Inc., Adobe Inc., and ServiceNow Inc. - once Wall Street darlings - have each dropped at least 16% this year, collectively wiping out about $160 billion in market value. According to TradingView data, investors yanked money from software and services funds for two straight months through June, marking a dramatic reversal from the sector's previous 18-month run of dominance. "Tech obsolescence can come out of nowhere," observes Robert Ruggirello of Brave Eagle Wealth Management. "There's good reason people are growing cautious." The Morgan Stanley software basket now trades at just 23 times projected earnings - half its decade average and the lowest valuation since at least 2014.

Which Software Companies Are Actually Thriving in the AI Era?

Not all software stocks are created equal in 2025. Microsoft Corp., Oracle Corp., and Palantir Technologies Inc. have emerged as clear winners, with their AI capabilities driving outperformance. What separates them? They're playing offense with AI rather than just defending existing products. Microsoft's Copilot integration across Office products and Palantir's AI platform deployments for government and enterprise clients demonstrate how companies leveraging AI for growth are being rewarded. Even cybersecurity firms like CrowdStrike are holding up well, as investors believe AI can't easily replace their specialized offerings. Meta Platforms provides another interesting case - its AI-powered ad targeting is driving accelerating revenue growth despite not being a traditional software company.

Is This Just a U.S. Phenomenon or a Global Trend?

The software shakeout has gone global. Europe's SAP SE, along with smaller peers like Sage Group and Dassault Systèmes, took hits after Monday.com's warning about competitive pressures. Ruggirello offers a vivid analogy: "Software vendors are like an energy company waking up to find they're suddenly competing with a new Exxon-sized rival." This refers to how OpenAI's ChatGPT, now boasting 700 million weekly users, has changed the competitive landscape overnight. The valuation compression isn't limited by geography - it's hitting any software company perceived as vulnerable to AI disruption or slow to adapt.

What Do the Sector Weightings Tell Us About This Shift?

The software sector's influence in the S&P 500 tells a fascinating story of rise and relative decline. From less than 6% two decades before the 2021 peak, software and services grew to nearly 14.5% of the index (even after major tech companies were reclassified in 2018). Today, that share sits around 12%, eclipsed by semiconductor firms riding the AI hardware wave. Without Microsoft, Oracle and Palantir's strong performance, the sector's weight WOULD be even lower. This rotation reflects how capital is flowing toward companies building AI infrastructure rather than those merely using it.

Are There Buying Opportunities in the Software Selloff?

Some Wall Street analysts spy potential in the wreckage. UBS strategists recently suggested the selloff in certain software segments could create opportunities, particularly in internet and software firms that missed the initial AI hype. "While AI revenue growth has yet to match the industry's aggressive spending, rising monetization and adoption trends are encouraging," noted Ulrike Hoffmann-Burchardi, UBS's global head of equities. However, selectivity is crucial - investors need to distinguish between temporarily oversold quality names and companies facing genuine structural challenges from AI disruption.

How Is AI Changing the Software Investment Thesis?

The old software playbook - predictable subscription revenues, high margins, and "land and expand" strategies - no longer guarantees success. AI has introduced new variables: Can the company's products incorporate AI features that customers will pay extra for? Does it have proprietary data to train models? Is its workforce skilled in AI development? These questions are reshaping valuation methodologies. As the BTCC research team points out, "Investors are applying discount rates to traditional software cash flows while paying premiums for AI-driven growth - that bifurcation creates both risk and opportunity."

What Historical Parallels Can We Draw From This Shift?

The current transition echoes previous tech inflection points - the MOVE to cloud computing, the rise of mobile, the dot-com boom and bust. Each time, incumbents faced existential challenges while new leaders emerged. What makes AI different is the speed of adoption and the capital intensity required to compete. OpenAI's explosive growth to 700 million weekly users happened in roughly 18 months - a pace that would have been unimaginable during previous tech shifts. This compressed timeline leaves less room for error for slower-moving incumbents.

How Should Investors Approach Software Stocks Now?

The key is differentiation. "The perception is that risk has gotten much higher, and we're not going to get clarity anytime soon," says Ruggirello. "All we can really say is that a few companies like Meta and Microsoft seem to be winning, and they keep winning. It certainly isn't everyone." Investors might consider: 1) Companies with AI products already contributing to revenue growth 2) Firms with durable competitive advantages AI can't easily replicate 3) Potential acquisition targets as larger tech companies seek to buy AI capabilities. As always, diversification and careful position sizing remain crucial in this volatile environment.

This article does not constitute investment advice.

Frequently Asked Questions

Why are software stocks underperforming in 2025?

Traditional software stocks are struggling due to investor concerns about AI disruption, slower growth in some segments, and rotation into companies more directly benefiting from AI infrastructure spending.

Which software companies are performing well despite the sector weakness?

Microsoft, Oracle, and Palantir have outperformed due to their successful AI strategies, while cybersecurity firms like CrowdStrike are holding up as their offerings remain difficult for AI to replicate.

Is this software downturn different from previous tech sector corrections?

Yes, the AI transition is happening much faster than previous tech shifts, compressing the timeline for companies to adapt. The capital requirements to compete in AI are also significantly higher than in previous transitions.

Are there buying opportunities in the software sector now?

Some analysts believe select software companies have been oversold, particularly those with strong competitive positions that can integrate AI into their offerings, but careful selection is crucial.