Software Stocks Struggle Despite Solid Earnings

TradingKey - On Tuesday, the software industry’s two benchmarks — Salesforce Inc. (CRM) and Snowflake Inc. (SNOW) — staged a dramatic seesaw performance in the secondary market. The turbulence not only pulled the entire software sector under deeper public scrutiny but also revealed a worrying truth: even decent earnings can no longer reassure investors. The market is voting with its feet.  

Software Stocks Extend Their Slide

Let’s begin with the SaaS pioneer, Salesforce.  

The latest quarterly report beat expectations on both revenue and profit; by almost any measure, it was far from a disappointment. Yet the spark that ignited a sharp sell‑off was the company’s outlook for fiscal year 2027. That guidance came across as cautious, implying that enterprise‑software demand has not rebounded as strongly as hoped, that customer procurement cycles are lengthening, and that the short‑term boost from AI remains limited. For a long‑standing bellwether that has benefited from an “AI premium,” simply delivering “no surprise” equaled “disappointment” in the eyes of a hyper‑sensitive market.  

Snowflake represented the same concern in another form.  

As a widely recognized beneficiary of AI data infrastructure, it still reported impressive growth in product revenue and accelerating AI usage. On paper, those numbers looked textbook‑perfect. But high expectations invite harsher questions: How long can this growth pace last? Will hefty AI R&D spending start to erode margins? Has the stock already priced in the next five years of good news?  

That skepticism turned a promising initial rally into a volatile reversal — every flicker of sentiment now has the power to erase gains within hours. Both companies illustrate the broader sector’s bind. The iShares Expanded Tech‑Software Sector ETF (IGV), which tracks major software names, has fallen about 24% year‑to‑date, roughly 30% below its 2025 high. On the weakest trading days, more than US $220 billion in market capitalization vanished in a single session, with leaders such as Datadog Inc. (DDOG) and CrowdStrike Holdings Inc. (CRWD) declining by double digits.  

Why the Market Rejects the Results

Seen in industry context, three structural contradictions are driving this disconnect.  

First, valuations have run ahead of fundamentals. Over the past two years, quality software names wearing the “AI beneficiary” label have commanded excessive premiums. Investors pre‑paid for explosive growth; when earnings turn out merely “good,” share prices correct sharply as valuation multiples mean‑revert.  

Second, AI has become a compulsory subject — not an optional bonus. For now, AI spending is treated as a defensive investment. Nearly every vendor is building AI assistants, yet the payoffs have not meaningfully steepened the revenue curve. The market keeps asking: when will those vast compute and R&D budgets translate into tangible free cash flow?  

Third, the IT budget is a zero‑sum game. At the macro level, corporate technology spending is not expanding without limit — it is being re‑allocated. Funds are migrating from traditional software lines toward AI‑centric platforms, igniting fierce competition for a static pool of resources.  

Citrini’s “Crisis Story”: Spark, Not Gunpowder

Against this fragile backdrop, “Citrini Research’s” essay envisioning an “Intelligence Crisis of 2028” struck right at the market’s nerve. The article outlined an extreme scenario: AI displaces white‑collar workers en masse, leading to declining consumption, a potential recession, and eventually a stock‑market downturn. The author described it as a thought experiment; yet under an emotional magnifying glass, it quickly morphed into a doomsday script for the software industry.  

Why did a single blog post trigger a US $200 billion sell‑off that day? On the surface, it looked like panic over one opinion piece. In reality, it offered an outlet for pent‑up tension in both sentiment and valuation. Three forces converged. Valuations were already brittle — at these multiples, any narrative that challenges long‑term assumptions invites repricing. The story was irresistibly vivid — mass AI layoffs, subscription prices under pressure, outsourcing contracts slashed — images easy for investors to visualize and amplify. And short‑term funds were itching to lock in profits. When positioning is crowded, a sensational headline is enough to trigger algorithmic selling and magnify volatility.  

Conclusion: Returning to Common Sense in a Noisy Market

Acknowledging the pressure does not mean ignoring the facts.  

Software companies are users of AI, not passive victims. Platform players own data and customer networks, positioning them to turn AI into a competitive weapon rather than a threat.  

There is also a point of logical consistency: if AI investment truly yields low returns, its disruptive power is limited; if its potential is indeed vast, then existing software giants remain closest to monetizing it.  

The current downturn represents de‑foaming, not deterioration. Most firms are still growing; the pullback is adjusting valuations to levels sustainable under normal growth assumptions. It is a natural process of sorting genuine winners from speculative momentum.  

Going forward, investment logic must shift from “listening to the story” to “reading the ledger.” The focus should be on three measurable pillars: the real revenue contribution of AI within company top lines, the cash‑flow conversion of R&D and compute spending, and the direction of client budgets in an environment of shifting priorities.  

As Wall Street analysts note, large institutions will only rebuild positions when AI headlines stop defaulting to “bad news.” Once software stocks move past macro‑driven sentiment trades and return to quantifiable value trades, the next real opportunity will finally emerge.