Investors will have noticed that tech is really struggling: European tech stocks have fallen sharply and the S&P North American software index is on a three-week losing streak, with a 15% drop in January, its biggest monthly decline since October 2008.
The worry is where will this lead. Perceived risks to the tech and software industry have been simmering for months.
Concerns are also brewing in private equity, with investors checking their portfolios for businesses that could be vulnerable.
“Last week’s sell‑off was sparked by the release of new AI legal‑analysis tools, which reignited concerns that large language model platforms could erode the competitive moat of incumbents,” said John Wyn-Evans, head of market analysis at Rathbones. “The reaction was swift and indiscriminate: even highly profitable firms with strong balance sheets and deep proprietary datasets came under pressure.”
That shift captures just how quickly investor sentiment has reversed.
“From last year’s broad AI‑driven optimism to a wave of pessimism that treats the entire sector as vulnerable, regardless of fundamentals,” said Wyn-Evans.
“For years, investors have funnelled hundreds of billions into tech businesses, banking on steady growth and resilient, recurring revenues,” said Ken Barry, head of Europe private equity at law firm White & Case. “While AI was initially seen as a key enabler of tech investment, it has now changed previous assumptions and there’s growing concern that it could disrupt these businesses.”
As a result, Barry noted investors are increasingly focused on AI-driven disruption risks, and he expects them to show “greater caution in due diligence and capital allocation decisions.”
For Rob Almeida, portfolio manager and global investment strategist of MFS Investment Management, AI is creating evolving business models, which investors should be aware.
“AI is driving changes in software pricing, with a shift toward hybrid models combining seat-based and value-based pricing. This evolution could benefit active investors who identify emerging opportunities,” he said.
Using a restaurant analogy, Almeida explained how AI could shift value from traditional software providers (the restaurants) to AI-driven platforms (the delivery apps), fundamentally altering customer relationships.
But tech and software nevertheless face pressure over the short and longer term. “The overriding market narrative remains the intense pressure facing software and data‑provider stocks linked to AI‑driven disruption,” said John Wyn-Evans.
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