The $24 Billion Bet Against Software: Are AI Tools Really That Threatening?

$24 billion. That's how much hedge funds have shorted software stocks this year alone. What do they see that others don't?

This week, AI company Anthropic unveiled new AI tools, and software stocks immediately went into free fall. Thomson Reuters, Salesforce, and LegalZoom led the carnage in U.S. markets, while the sell-off spread across the Pacific to hit Asian IT giants Tata Consultancy Services and Infosys.

The panic wasn't just about one company's product launch. It was about existential questions that have been brewing for months: Can traditional software companies survive the AI revolution?

When AI Becomes Your Competition

Anthropic's new "Claude Cowork" AI agent isn't just another chatbot. It's designed to handle complex professional workflows that form the bread and butter of many software companies: legal research, customer relationship management, data analytics, and technology research.

The S&P 500 Software & Services Index dropped over 4% on Thursday alone, extending its losing streak to eight consecutive sessions. The index is now down roughly 20% year-to-date, reflecting deeper concerns about AI's disruptive potential.

What spooked investors wasn't just the capabilities of these new tools, but their timing. AI agents are becoming sophisticated enough to tackle tasks that enterprises currently pay software companies billions to handle.

"The Most Illogical Thing in the World"

Tech industry leaders are pushing back hard against the doom-and-gloom narrative.

Nvidia CEO Jensen Huang didn't mince words at a Wednesday event: "There's this notion that the software industry is in decline and will be replaced by AI. It is the most illogical thing in the world." His argument? AI will enhance and utilize existing software tools rather than completely replacing them.

Arm Holdings CEO Rene Haas echoed this sentiment, dismissing recent market fears as "micro-hysteria" in comments to the Financial Times. He argued that enterprise AI deployment remains in its early stages and isn't yet massively transformative.

Wedbush Securities backed up these executives' views, noting that "enterprises won't completely overhaul tens of billions of dollars of prior software infrastructure investments to migrate over to Anthropic, OpenAI, and others." The research firm pointed to the decades it took large enterprises to accumulate trillions of data points now embedded in their software infrastructure.

The Survival Test: Mission-Critical vs. Nice-to-Have

But not all analysts are buying the reassurances. The market sell-off reflects genuine concerns about margin pressure and pricing power, even if it doesn't signal an industry apocalypse.

Constellation Research warned Wednesday that AI could indeed pressure software companies' profits and limit how much they can charge customers. The question isn't whether AI will impact software—it's which companies will thrive alongside it.

Futurum Group's tech equities analyst Rolf Bulk offered a nuanced view: "There's likely to be cannibalization of SaaS by AI-driven workflows and that will impact the multiple the sector trades on." However, he identified a subset of software providers—especially those running mission-critical enterprise workloads like Oracle and ServiceNow—that still have a sustained "right to earn."

The differentiator? The depth of their data and their entrenched role in customer workflows make them more likely to coexist with AI rather than be replaced outright.

The Adaptation Strategy

Some companies are already betting on coexistence rather than competition. Market research firm AlphaSense is leveraging AI tools across its product offerings, with SVP of Product Chris Ackerson stating that "the future belongs to providers that combine advanced AI with trusted content, explainability and deep domain context."

This approach suggests a middle path: software companies that can integrate AI capabilities while maintaining their unique value propositions may not just survive but thrive.