AI-driven disruption is creating a seismic shift in the software sector in 2026, forcing a re-evaluation of valuation models as automation challenges established, high-fee enterprise players. The Tech-Software Sector ETF (IGV) has fallen about 27% year-to-date, driven by concerns that generative AI makes software creation faster and cheaper, allowing companies to pivot from buying to building, or adopting lower-cost AI alternatives.

But now we’ve seen other sectors taking a hit over the last few months, including Real Estate, Trucking and Financials. The Financial sector within the S&P 500 is down 10% since hitting record highs in January and is at eight-month lows after yesterday’s 3.3% slide.

Artificial intelligence is no longer just a growth catalyst for technology companies, it has become a direct disruptive force, particularly for the global software industry. So far this year, markets delivered a stark verdict: AI is not merely enhancing software; in many cases, it is threatening to replace it.

That realization has triggered one of the sharpest rotations in equity markets since the post pandemic tech unwind, with software stocks bearing the brunt of investor anxiety. What began as optimism around AI monetization has rapidly morphed into fear over business model obsolescence, especially for software companies built on seat based subscriptions and workflow automation.

The sell-off has been particularly severe across Software as a Service (SaaS) names: Salesforce (CRM) and ServiceNow (NOW) both dropped sharply to multiyear lows as investors questioned whether AI agents could replicate CRM workflows and IT service management without human intervention. Adobe (ADBE), Workday (WDAY) and DocuSign (DOCU), were also swept up in what some traders have called the “SaaSpocalypse,” as fears grew that generative AI could undercut high margin subscription pricing.

Not everyone agrees the damage is permanent. Some executives, including Nvidia’s (NVDA) CEO Jensen Huang, have argued that AI will augment rather than replace software, calling the sell off “illogical”. Analysts may suggest that several high quality software companies could now be undervalued, particularly those with deep integration, high switching costs, or proprietary data moats. Still, even bullish analysts concede that the rules have changed. Software companies must now prove not just growth, but defensibility in an AI native economy.

AI has ushered in a new phase for markets, one defined less by enthusiasm and more by selectivity. Software is no longer a uniform growth trade, and other sectors may also be impacted by the technology. Investors are differentiating sharply between companies that sell tools to humans and those that power machines that replace them.

We get more clarity on the impact of AI this week with earnings. Workday (WDAY) reports after the close today and expectations are low with the stock at 6-year lows into its report. Tomorrow brings reports from Nvidia (NVDA) on the picks-and-shovels side of AI along with Salesforce (CRM) and Snowflake (SNOW), which are both down over 40% from their recent highs.

The bar is extremely low into the reports with investors focused on guidance more closely than ever before. While the quarterly numbers may be above estimates, the impact of AI to their businesses may be seen in guidance for the current quarter and full-year estimates.

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