Tech selloff: Reset, not rupture

The tech sector has come under sustained pressure in recent days, with Anthropic’s latest model upgrade amplifying concerns that rapid AI progress could threaten traditional software business models. A sharp decline in software stocks has rippled through IT services, semiconductors, and adjacent industries such as media and business services.

Crucially, this pullback did not emerge suddenly. Over recent quarters, investors have grown increasingly skeptical that AI adoption will translate into measurable productivity gains, that elevated AI‑related capex will ultimately feed through to earnings, or that valuations across the AI ecosystem are sustainable. Until recently, however, there had been less attention on which companies may be structurally exposed to AI‑driven disruption.

This shift in sentiment contrasts with continued earnings growth across the tech sector. Much of the drawdown since last autumn has been driven by multiple compression rather than deteriorating fundamentals: P/Es have fallen by more than 8 points, approaching levels last seen just before ChatGPT’s debut in late 2022.

The divergence—rising earnings alongside falling multiples—suggests that the scale of the sector’s decline, and particularly this week’s software selloff, may be overdone. Nonetheless, as markets increasingly scrutinize which companies are most exposed to AI-driven substitution, the investment case for tech is no longer as straightforward. The AI cycle appears to be entering a more mature phase: shifting from an environment that rewarded almost all tech exposures to one where AI advancement more clearly differentiates adaptive, resilient models from those that are easily automated.

History underscores this pattern. Creative destruction has long defined technological progress, and examples from even the past two decades remain vivid. Amazon evolved into a global e‑commerce and cloud leader, illustrating how companies can successfully redefine their models in the face of disruption. Conversely, Blockbuster became obsolete when it failed to adapt to the rise of digital streaming. Some firms embraced new technological paradigms and successfully re‑architected their businesses; others failed to recognize how quickly their competitive moats were eroding.

These examples serve as a reminder: technological disruption rarely eliminates all incumbents, but it does reshuffle the hierarchy. The AI era is likely to do the same. Business lines most exposed to automation will face heightened scrutiny, and as AI adoption accelerates, investors will need to assess which firms can adapt, or even thrive, across both tech and broader services sectors.

Companies most likely to demonstrate resilience tend to share four characteristics:

• Strong fundamentals. Firms with healthy balance sheets, solid revenue and earnings growth prospects, and meaningful benefits from AI adoption—whether through time savings, higher customer engagement, or unlocking new monetization opportunities.
• Diversified business lines and proactive AI integration. Firms reliant on a single core product that can be replicated by AI are more exposed. By contrast, companies that embed AI, such as agents, into their platforms to enhance, rather than replace, existing offerings are better positioned.
• Regulatory or operational barriers to entry. Businesses operating in highly regulated sectors, such as healthcare, face lower displacement risk given compliance hurdles for AI-only solutions. Workflow or audit related tools that support regulatory obligations may also prove more resilient, as the cost of errors and fines discourages clients from adopting untested AI alternatives.
• Proprietary data central to revenue generation. While not fully insulated, firms whose value proposition rests on unique, high quality datasets have stronger defenses against commoditized AI outputs.

Given this backdrop, investors should be cautious about interpreting the recent pullback as mere mean reversion or as an opportunity to buy the sector indiscriminately.

Even so, this week’s broad based selling has captured many companies, including software firms with durable competitive advantages, strong renewal rates, and meaningful barriers to AI-driven automation. Selective, disciplined stock selection will be essential to identify firms with resilient business models and credible adaptation strategies that are now trading at more attractive valuations.

While tech has experienced turbulence, broader equity markets have shown encouraging signs of diversification. Investors have rotated across regions, sectors, and factors toward companies with less direct exposure to AI disruption and those likely to benefit from a strong macro backdrop. As such, despite tech’s weakness, the S&P 500 remains only about 1% below its record high, and international markets continue to perform well.

Recent softer U.S. labor market data (weak private payrolls, declining job openings, and rising jobless claims) temporarily weighed on sentiment. However, our broader view remains unchanged: the overall macro backdrop is constructive, supported by resilient consumers, healthy profitability, and ongoing fiscal and monetary support. With this macro foundation in place, the current rotation away from narrowly concentrated tech leadership should persist.