Software stocks got crushed. Did they have it coming?

Katie Martin (0:06)

Pushkin.

Remember that whole thing in February? Markets got spooked by this sudden moment of dread that AI would demolish everything in its path, starting with software companies and ending in our livelihoods. It wiped a trillion dollars off the value of software stocks, and those stocks are still down as a group, about 20% from where they were a year ago, even when the rest of the market is up a fair amount. And look, it remains possible that AI will kill all the jobs, and then, I don't know, kill all the humans. But here at Unhedged, we are humble markets people, ill-equipped to tackle such grand moral and social issues. What we want to figure out is whether that market shakeout was overdone or a warning of things to come. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, where the producers have tried to ban me from talking about the weather, but God, it is so hot, like insanely hot.

Joining me, joining me down the line from New York City, we just can't keep him away from the show, and if we did, Donald Trump would call FIFA up and make us take him back. It's Rob Armstrong, off of the Unhedged newsletter.

Rob Armstrong (1:29)

Katie, it's just a law of nature that British people must talk about the weather.

Trying to stop them is like trying to travel at greater than the speed of light, or have gravity go the other direction.

I don't know why the producers even ask you to not talk about the weather. There's nothing to be done about it.

Katie Martin (1:48)

But the other thing that we are genetically programmed to talk about is the football. Your boys took a hell of a beating of Belgium last night.

Rob Armstrong (1:57)

But if they won, there would have been this horrible asterisk next to it after the president tried to reverse the red card thingy. Look, there is a kind of aspect of this which is like, FIFA? Corrupt?

Stop the presses. But still, it's not a good look, and we would have had some explaining to do. Anyway, moving on.

Katie Martin (2:24)

Yes. Matter at hand is like, AI and tech, which bits of the market is eating first and what that is all telling us. Why don't you take us back to that weird period in February when everything went a bit skewed?

Rob Armstrong (2:41)

Well, we got that report from a research firm that sketched in possibly incoherent terms how AI might cause the economy, as we now understand it, to collapse and everything would be different now. So, Cetrini? Is that the name of the firm?

Katie Martin (3:02)

Yeah, Cetrini Research.

Rob Armstrong (3:04)

Anyway, what that report showed was that the market was searching about for a reason to panic about AI and panic it did. And a lot of stocks got punched in the face. But the stocks that got punched in the face hardest, then and kind of throughout the whole AI excitement, are companies that make software, basically big corporate software companies. And the picture is you're going to be able to make your own software by Vibe coding.

And you won't need to buy software from Adobe Intuit Workday Service, now Salesforce, Oracle, or the rest of the lads.

Katie Martin (3:47)

Now, it wasn't just the Cetrina research paper though, was it? It was also the Anthropic launched Claude Cowork, which is this sort of AI coding thing. And people started using it and they were like, holy smokes, this thing is good.

Rob Armstrong (4:01)

Yes.

Katie Martin (4:02)

It massively speeds up my coding time.

This is a total game changer. I mean, I really don't know anything about coding. I'm going to put my hands up here and say, no clue. But people who do have a clue, like, whoa, this thing is the real deal. So suddenly, as you say, we had this big hit to software stocks. So in the US, the S&P 500 Software and Services Index, the Stocks Index, covers this sector, is still down 21% from a year ago.

Rob Armstrong (4:32)

And some big constituents of that index are down a lot more than that.

Katie Martin (4:35)

Yeah.

And that's hugely out of whack with the rest of the market. So the rest of the market is saying, yay, AI, it's also fantastic. This is going to pay for our retirements. But there's this sub-sector that's bleeding out.

So we did a bit of work on the newsletter this week, didn't we? We're trying to figure out, have some babies been thrown out with the bathwater here, or does this actually make sense?