Software companies have shed approximately $2 trillion in market capitalization over the past year in the largest non-recessionary drawdown in over three decades, yet the broader S&P 500 sits just below all-time highs as investors distinguish between AI winners and losers. The divergence reveals how capital is flowing toward infrastructure providers and foundation model developers while legacy software-as-a-service companies face existential disruption concerns.
The software sector has declined 34 percent from its peak, reducing its weight in the S&P 500 from 12.0 percent to 8.4 percent, according to analysis from JPMorgan's Dubravko Lakos-Bujas. The WisdomTree Cloud Computing Fund has plummeted approximately 20 percent year-to-date in 2026, with individual companies suffering even steeper losses. HubSpot has fallen 39 percent this year following a 42 percent decline in 2025. Figma has dropped 40 percent, Atlassian is down 35 percent, and Shopify has lost 29 percent.
The selloff accelerated following product announcements from Anthropic, particularly the February release of Claude Cowork with legal, finance, and product marketing capabilities. The open-source nature of Cowork plugins enables customization, raising concerns that AI-native tools could replace specialized software categories. Box CEO Aaron Levie acknowledged the industry faces "cognitive dissonance" as companies see AI's power to enhance products while reckoning with broader fears that AI will destroy their business models.
Despite the software carnage, the S&P 500 closed up 0.47 percent on February 9, leaving the index just below all-time highs. Seventy-five percent of companies reporting fourth-quarter earnings have beaten consensus estimates, with earnings per share 12 percent higher year-over-year and 5 percent above pre-quarter consensus, according to both Bank of America and Wells Fargo. This disconnect illustrates that AI infrastructure spending is driving gains elsewhere in the market even as it threatens traditional software.
Public and private markets have decided infrastructure companies and top model developers are AI winners. Anthropic signed a term sheet for a $10 billion funding round at a $350 billion valuation in early February. OpenAI reportedly eyes a valuation exceeding $800 billion. Google parent Alphabet has seen its stock soar over 60 percent in the past year, lifting its market capitalization to $4 trillion. These valuations reflect confidence that foundation models and the infrastructure supporting them will capture disproportionate value.
Bank of America's Tom Curcuruto maintains a forecast of approximately $140 billion in hyperscaler direct debt issuance for 2026, with risks skewed upward. This capital will flow to the top ten AI companies including OpenAI, Anthropic, and others, then get spent on real estate development, data center equipment, and power stations needed to supply AI with energy. These expenditures create tailwinds for stocks in construction, utilities, and hardware sectors even as software struggles.
Software executives are attempting to counter the narrative. ServiceNow CEO Bill McDermott stated his products serve "as the semantic layer that makes AI ubiquitous in the enterprise" and cannot be easily replaced. Box's Levie described the current moment as "the most exciting" in his company's twenty-year history despite the stock declining 17 percent in 2026. These executives argue AI will enhance rather than replace their offerings, but investors remain skeptical given the velocity of AI-native product development.
