Software Stocks' 2025 Decline: AI Disruption Concerns and Market Outlook

On December 16, 2025, Barron’s published an article highlighting that major software stocks have “taken a beating” in 2025, driven by investor concerns about AI’s potential to disrupt traditional software business models [1]. The decline persists despite strong financial results from many companies, indicating a sentiment-driven sell-off focused on future risks rather than current performance [1].

Key software stocks have seen significant YTD declines and peak-to-trough drops: Salesforce (CRM) is down 24.2% YTD with a 39.5% peak-to-trough decline, Adobe (ADBE) is down 22.3% YTD with a 33.1% peak-to-trough drop, and even Microsoft (MSFT) and Oracle (ORCL), which remain up YTD (11.95% and 11.89% respectively), have experienced 37.9% and 65.6% peak-to-trough declines [0]. Sector ETFs like IGV (5.05% YTD, 35.0% peak-to-trough) and XSW (-1.35% YTD, 33.0% peak-to-trough) reflect broad sector volatility [0].

RBC analyst Rishi Jaluria’s comment that AI could be “the death of software” encapsulates the core concern: AI’s potential to replace traditional software solutions with more intelligent, integrated systems, fundamentally altering software companies’ revenue models [1]. This follows broader tech sector recalibration after earlier AI-fueled exuberance, with growing fears of an AI valuation bubble [2].

1. Sentiment vs. Fundamentals
   : The software stock decline is driven by future AI disruption fears rather than poor current financial performance, demonstrating a disconnect between market sentiment and fundamental metrics [1].
2. AI Bubble Spillover
   : Concerns about inflated AI valuations in the broader tech sector have spilled into software stocks, even for companies with established AI strategies [2].
3. Valuation Sensitivity
   : Investors now demand tangible evidence of AI’s impact on revenue and productivity, rejecting speculative AI-focused valuations [1].
4. Peak Volatility
   : Even “winning” software stocks have experienced significant peak-to-trough volatility, indicating widespread market uncertainty about AI’s long-term impact [0].

1. AI Disruption
   : The potential for AI to replace traditional software solutions could erode revenue streams for legacy software companies [1].
2. Valuation Bubble
   : Persistent concerns about inflated AI valuations may lead to further market corrections in the software sector [2].
3. Lack of Tangible AI ROI
   : Companies that fail to demonstrate clear AI-driven revenue growth or productivity improvements may continue to underperform [1].

1. AI Integration Leaders
   : Software companies that successfully integrate AI into their products and show measurable ROI may outperform peers in the long term [3].
2. Valuation Reset Benefits
   : The ongoing valuation reset could create buying opportunities for fundamentally strong companies with viable AI strategies [3].

• AI adoption rates across enterprises and their impact on traditional software sales [1].
• Individual company AI strategies and investments [1].
• Earnings reports for evidence of AI-driven revenue growth [1].
• Analyst commentary (e.g., from Rishi Jaluria) on AI’s evolving sector impact [4,5].

This analysis synthesizes findings on the 2025 software stock decline, driven by investor concerns about AI disruption and a broader tech sector valuation reset. Major stocks have experienced significant volatility, with declines persisting despite strong current financial performance. The “death of software” comment from RBC’s Jaluria underscores market uncertainty about AI’s long-term impact on software business models. Investors are increasingly demanding tangible evidence of AI’s ROI, creating both risks for laggard companies and opportunities for AI integration leaders.