Microsoft, Palantir, Salesforce, Adobe: How OpenAI and Anthropic crushed software’s 23-year reign

Core Viewpoint - The software sector is experiencing a significant downturn, with stocks facing existential threats from AI, leading to a debate on whether the selloff is justified or an overreaction [1][2]. Group 1: Software Sector Performance - Global software stocks have seen declines between 15% and 35% over the past 30 days, with Accenture and EPAM Systems losing 25% and 35% respectively [2]. - The Nifty IT index has also dropped by 16% during the same period, indicating a broader trend in the software sector [2]. - The iShares Expanded Tech-Software Sector ETF (IGV), which includes major firms like Microsoft and Oracle, has seen its performance ratio against the Nasdaq Composite index fall back to 100, erasing previous gains since the 2002 tech bull market [3][4]. Group 2: Drawdown Analysis - The current drawdown of 37% for software stocks is the worst in the post-dotcom period, surpassing previous drawdowns including those in 2022 [6]. - The standalone drawdown for IGV is over 30%, second only to a 50% drop in 2009 and a nearly 45% drop in 2022 [8]. - When comparing IGV to the S&P 500, the current ratio is worse than the trough formed in 2022, indicating significant underperformance [10]. Group 3: Semiconductor Sector Performance - In contrast to the software sector, the semiconductor sector is thriving, with companies like Nvidia and Micron benefiting from the AI boom [12]. - The iShares Semiconductor ETF (SOXX) has reached an all-time high in the post-dotcom period, reflecting strong performance compared to the Nasdaq Composite [13]. - The relative performance of SOXX against IGV has dramatically improved, with the ratio skyrocketing to 200 over the last 10 months [14]. Group 4: Valuation Considerations - Valuations for major chip stocks, except Nvidia and AMD, are above their five-year average multiples, while software stocks are trading below their five-year averages [18]. - In the Indian context, the Nifty IT index is trading at valuations higher than pre-Covid levels, despite corrections due to lack of earnings growth and AI disruption [21]. - Some mid-cap software companies are trading at high multiples that do not justify their earnings growth rates, raising concerns about sustainability [23].