Is “AI Disruption Risk” Starting to Show Up in the Stock Market?
It did not seem like a major news story at first glance. The AI research lab, Anthropic, announced updates to its Claude platform, including expanded “agent” capabilities. The demonstration signaled to markets that AI tools could increasingly serve as a kind of centralized interface for knowledge work. It could automate coding, legal review, and even operational workflows at a high level of sophistication.
Generally speaking, it’s what we’d expect in the next phase of AI development. But then came the sharp slide in software stocks.1
What was once seen as a tool to supercharge productivity and product development suddenly became a disruption risk. Investors who were previously underwriting 15–20% medium-term revenue growth for many key names in the software space were now pricing many of these same companies closer to 5–10%. The question is, what exactly changed?
In many cases, the answer was not projected 2026 earnings. Though the headline risk gripped the markets, there was no broad deterioration in reported revenue, cash flows, or operating margins. Importantly, earnings guidance also did not signal structural impairment across the industry.
In my view, what changed seemingly overnight was sentiment—specifically, long-dated assumptions about how AI may reshape competitive dynamics over time. It is fair to say that over the past two years, software valuations expanded meaningfully as investors assumed AI would accelerate growth, improve productivity, and entrench market leaders. Multiples reflected those expectations. But now we’re seeing the reverse, where the fear is that AI will commoditize certain software layers, compress pricing power, and erode moats.
What stands out to me is how much of this debate is rooted in forecasting scenarios that may or may not unfold years from now. There is a great deal of modeling the future, but very little concrete financial evidence, at least at this stage, that these risks are showing up in reported results.
To be sure, markets constantly discount the future. That’s what we expect markets to do. But when expectations swing rapidly based on hypothetical scenarios that may unfold years from now, valuations can detach from current fundamentals, in both directions. I think that’s what we saw in software stocks earlier in the month.
Disruption risk is real in technology, but we want to identify it in financial statements, not by making wagers. A focus on earnings when selecting companies for a portfolio will unearth early signs of decelerating revenue growth, shrinking margins, falling retention rates, and weaker free cash flow. Today, we are not broadly seeing that, but I certainly am not ruling out the possibility that we will sometime in the future.
Instead, we are seeing investors rapidly adjusting the terminal growth assumptions embedded in valuation models. When you move an implied growth rate from 15–20% down to 5–10%, the math alone can justify a sharp decline in stock prices, even if near-term earnings remain intact.
This does not mean the market is wrong, but I do think it means the market is repricing uncertainty. To me, that’s a sentiment trade, not a fundamental trade.
This market ‘event’ should also serve as a reminder to investors of why diversification is so important, which is a theme I continually revisit in this column.
In 2026, we are seeing signs of market broadening, with small-cap stocks showing relative strength, cyclical sectors outperforming again, and capital generally rotating into areas that were previously overshadowed by mega-cap technology leadership. When portfolios are properly diversified across sectors, market caps, and styles, investors participate in those shifts rather than being overly exposed to any theme. The software selloff becomes less of a major story and more of a contained episode within a broader market that continues to find strength in other areas.
Bottom Line for Investors
AI disruption risk is real, full stop. But it should be evaluated through earnings and cash flow, not solely through changes in sentiment. In my view, the recent selloff in software stocks appears driven more by shifting long-term assumptions than by collapsing fundamentals.
Innovation will continue, competitive dynamics will evolve, and some business models will prove more durable than others. But history shows that reacting to rapidly changing narratives, without confirmation in the numbers, often leads to volatility rather than value creation. Staying grounded in fundamentals and maintaining diversification remain the more durable strategies for navigating technological change.
Disclosure