“Software collapse broadens with nowhere to hide as AI rate-of-change is extrapolated in both logical and illogical ways,” JPMorgan analyst Mark Murphy wrote in a note to clients, arguing that markets are “overwhelmingly” focused on AI headlines, while underweighting the underlying resilience of enterprise software businesses.
Murphy highlighted that the IGV tech‑software ETF was down about 5 per cent intraday, taking the sector back towards levels last seen during the “peak tariff and DOGE fears” of early April 2025. The damage is now “very broad,” hitting mega‑caps and small‑caps alike, with stocks that were once viewed as relatively insulated from AI disruption, such as Cloudflare, Datadog and Snowflake, dropping “roughly 9-11 per cent” in Tuesday’s trade.
“There is now a broad, sweeping, mass exodus from software,” he said, warning that forced selling is driven by “index arb baskets, systematic deleveraging, factor contagion and a passive‑flow liquidity vacuum,” rather than a sober reassessment of fundamentals.
The latest leg of the crash has been triggered by Anthropic’s launch of its Claude Cowork plug‑ins, which span legal, sales and marketing, finance and accounting, data analysis, productivity and search. These plug-ins effectively turn Claude from a text chatbot into an agent that can execute tasks across a user’s Mac files and browser.
“This product launch is acting as a wake‑up call for generalist money,” Murphy wrote, adding that “generalist money flows are reacting to AI’s rate‑of‑change and overwhelming the software‑specialist investors who are more focused on stickiness and mission‑criticality.”
In his view, this is “an extreme example of how AI narratives can dominate price action,” with basket trades and de‑grossing adding fuel to the fire.On the “logical” side of the ledger, JPMorgan emphasised that there are valid reasons for investors to worry. The team, which describes itself as an “extreme bullish outlier” on AI since late 2022, reiterated its long‑held view that AI would “evolve at the speed of light” and carry “important potential ramifications for the software landscape,” including the possibility that AI agents “take on work that has historically lived inside systems of record.”
The report also flags that key leading indicators of software demand remain “declining/sluggish,” that software and broader US headcount growth dropped from about 5 per cent five years ago to “roughly 0 per cent” now, and that “AI is legitimately crowding out traditional enterprise projects in IT budgets.”
“We also note that insider buying has been notably absent,” the analysts wrote, calling this “another source of erosion in investor confidence.”
However, Murphy argues that fear is now outrunning fundamentals and producing “illogical” conclusions. “Our CIO survey work does not suggest the imminent death of the broader software landscape, to any material extent,” he said.
In his view, it is “an illogical leap” to assume that the emergence of Claude Cowork plug‑ins means “every company is about to build and maintain homegrown systems to replace every layer of mission‑critical software.”
He likens current sentiment to the 2020-21 euphoria, noting that “many of the same institutional investors who were buying software at 20‑year valuation highs on the belief that cloud was the perfect business model and rates would stay at zero forever are now selling software at 25-30-year valuation lows versus semis.”
The pain is being felt even by companies delivering robust numbers. The report points to ServiceNow, which is still showing “resilient growth” despite US federal headwinds, and to Microsoft, where Azure is growing “materially faster” at massive scale than it did 9-12 months ago, yet both continue to face “intense waves of selling pressure.”
At the same time, Murphy argues that the “rules of the road” for software have become skewed: “Traditional software is now being told it has to accelerate to disprove the AI‑disruption thesis,” he wrote, even though post‑Covid pull‑forward and a higher cost of capital are “naturally forcing deceleration across the sector.”
In many cases, “the buy‑side bar has magically RISEN while the stocks have dropped,” he added, leaving “very little room for error” ahead of the next round of earnings.
Rather than denying the narrative shift, JPMorgan urges investors to reposition within the group. The bank continues to advocate a barbelled strategy across value and growth software, emphasizing valuation discipline, a focus on names that rank highly in its CIO surveys, strong free‑cash‑flow support, and resilient/sticky revenue streams.
“We believe AI disruption risk is now fully front‑of‑mind,” Murphy concluded, suggesting that the ongoing software rout reflects a mix of justified repricing and “illogical extrapolation,” and that the challenge for investors is to separate genuine structural threats from yet another extreme swing in market psychology.