It was a rough week on Wall Street for technology stocks, and software took the brunt of it.
This week’s chart shows the relative performance of the S&P 500 Software sector compared to the broader S&P 500. It’s a brutal picture. Nearly six years of relative outperformance has been erased in just a few months.
What’s going on? Well, a big part of the story is something you may hear referred to as “vibe coding.”
Vibe coding is the idea that software is becoming less about teams of engineers writing thousands of lines of code, and more about using AI to describe what you want and letting the system build it for you. So now, investors are questioning how durable many software business models really are. If AI can replicate or replace parts of what these companies sell, are their current prices justified?
It’s a valid concern. But what’s notable is that, despite the carnage in the software sector, the broader market has held up relatively well. Investors aren’t really panicking about the economy, per se, or corporate profits. Instead, this looks more like a rotation. Money is moving away from parts of the market facing disruption and into areas that benefit from AI investment.
The bottom line is that this selloff appears to be about who wins in the next phase of technology. This could lead to some broader weakness in the market, but so far, it appears to be more of a rotation.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.
The S&P S500 Software Industry GICS Level 3 Index comprises stocks in the S&P Total Market Index that are classified in the GICS Application Software, Interactive Home Entertainment, IT Consulting & Other Services and Systems Software sub-industries.