by Krystal Daibes Higgins, CFA
Senior Vice President
Equity Research and Portfolio Management
Over the last several weeks, pressure on software stocks has intensified as investors grapple with what some have dramatically labeled a coming “SaaSPocalypse.” For those new to the term, “SaaS” is shorthand for software as a service. A classic example is Salesforce where users pay for ongoing access to the software rather than buying it outright.
Fears that generative AI will commoditize computer code, erode pricing power and flatten competitive advantages have led to sharp selloffs across parts of the technology sector, most acutely within software. Valuations that once assumed durable double-digit growth are being reassessed against a backdrop of rapid technological change. Yet in our view, the market’s reaction has been broad and indiscriminate, painting with too wide a brush.
Software is not dead. What is changing is the bar for differentiation. Businesses with narrow competitive moats and limited switching costs are understandably more vulnerable in a world where AI can replicate incremental functionality. But the history of technological disruption tends to follow a path where innovation consolidates market share and value, rather than eliminating it. A handful of companies emerge as structural winners, which are often those that control proprietary data, deeply embedded workflows or mission-critical platforms that become more valuable as intelligence layers are added. As long-term investors, our focus remains on identifying those durable franchises rather than reacting to short-term narrative swings.
The broader market backdrop reinforces how nuanced today’s environment is. The S&P 500 is roughly flat year-to-date, but that headline masks meaningful divergences beneath the surface. Most constituents are actually positive for the year, and performance has broadened beyond the mega-cap leaders that dominated returns in prior years. Ironically, it has been the lackluster performance of the so-called Magnificent 7 year-to-date that has weighed on the S&P 500 returns. When a small group of heavily weighted stocks pauses after a multi-year surge, the index can appear stagnant even as underlying breadth improves.
We are also seeing a big rotation across styles and sectors. Capital has flowed out of the traditional large-cap growth names that demonstrated remarkable earnings resilience over the past several years and into more cyclical and value-oriented areas of the market. Financials, industrials and select energy and materials companies have benefited from renewed interest as investors position for a steadier economic backdrop and more normalized growth expectations. This rotation reflects both valuation recalibration and improving confidence that the expansion can persist without the narrow leadership that defined the prior phase of the cycle.
From a market-dynamics perspective, these shifts are typical after periods of concentrated performance. When leadership narrows and valuations expand significantly, even modest disappointments can trigger sharp valuation compression. At the same time, investors will look for underappreciated areas where expectations are lower and upside surprise is more achievable. We view the current environment not as a systemic unraveling, but as a transition from momentum-driven leadership toward a more balanced and selective market.
Software may be experiencing a “SaaSination” in sentiment, but we believe the opportunity set is becoming more selective rather than disappearing. In periods like these, discipline and fundamental analysis matter most.
Takeaways for the Week:
The recent selloff in software reflects anxiety over AI disruption, but we believe the market is overstating the risks and underappreciating the durability of companies with strong competitive moats
While the S&P 500 appears flat year-to-date, underlying performance is broadening beyond mega caps, with capital rotating toward cyclical and value sectors in a healthier, more diversified market environment