Can Software Stocks Put Up a Firewall Against AI’s Threat?

The investments you don’t own are often just as important as those you do.

After years of strong performance, software stocks have had their largest non-recessionary drawdown in almost three decades. One exchange-traded fund (called the iShares Expanded Tech-Software Sector ETF), which is a basket of software stocks, is down nearly 25% so far this year.

Software companies like Adobe, Salesforce, and Constellation Software are all down just about 25% since 2026 began. The data service providers, like Thomson Reuters, S&P Global, and Moodys, are also down nearly 20-30% this year.

(Disclosure: neither clients, Jeff Pollock, or Sunni Schneider have a financial interest in ADBE, CRM, CSU, TRI, SPGI, or MCO).

Through our experience, we believe contrarian investing delivers the best returns over time. This occurs when a security is so far out of favour that few people want to touch it. The stock price will also reflect the market’s pessimism.

Normally, we would be buying these deeply out of favour software stocks. However, our contrarian approach is to identify a problem that can reasonably be resolved. In this case, we see a fundamental structural shift in the sector rather than a one-time hiccup.

The bottom is not in for software and further downside is likely. 

For years, the software industry has thrived on the “seat-based” subscription model. If a company had 500 employees, they paid for 500 licenses. With artificial intelligence likely to displace the workforce (particularly white collar jobs), the recurring revenue business model is now far less certain.

“Vibe coding” is eliminating the need for many software companies and their engineers. This is when a small team can use AI to code a custom solution in mere days rather than months. Consequently, the rich valuation multiple that software stocks have received for signing multi-million dollar contracts now looks increasingly fragile.

Anthropic’s Claude Code, for example, is a tool that drastically slashes the time required to build complex software. In fact, it released Cowork last month, an application that automates work functions, and said it coded the program in merely 2 weeks.

Our company maintains an Approved List of securities to buy for clients when new cash is deposited, dividends accumulate, or a new client joins our firm. Heading into the year, the sole technology stocks on our Approved List to buy were Alphabet and Nvidia. (Disclosure: clients, Jeff Pollock, and Sunni Schneider have a financial interest in GOOG and NVDA).

Needless to say, we’re happy to have dodged the software selloff. 

While there may be opportunities in software in the future, we believe there is too much uncertainty around the recurring revenue business model because of the disruption AI is sure to cause. For that reason, we don’t plan to deploy capital into software stocks in the foreseeable future.

-written by Jeff Pollock