The Lesson for Investors As the AI Trade Cuts the Other Way

Remember that time in 2025 when artificial intelligence propelled technology stocks to great heights?

Well, now AI has come to eat your software stocks. Anthropic’s Claude AI program has released a new version that makes software coding a snap, and Wall Street fears that it will enable companies to skip the software provider and create their own software customized to their needs.

How scary is it? Goldman Sachs GS says software stocks might suffer a fate similar to newspaper stocks in the aughts. In short, there is panic selling out there, and it’s very hard to know if that panic is justified. With most downturns, investors can turn to historical precedents and market cycles to get an idea of how bad it will be. For example, as a recession bites, you expect economically sensitive industries like steel, autos, and energy to fall. Past recessions provide a ballpark idea of where things are headed, even though every market is a little different.

And man, is it ugly. IShares Expanded Tech-Software Sector ETF IGV is down 21% in 2026 (through Feb. 12). Microsoft MSFT is down 16%, Palantir PLTR is down 24%, Oracle ORCL is down 20%, Salesforce CRM is down 30%, and AppLovin APP is down 32%.

On a fund level, it is painful, but at least the rest of the market is doing better. Brown Capital Management Small Company BCSIX is the worst-performing Morningstar 500 fund, down 14.1% (amid a very nasty multiyear losing streak) as small-cap software names are hurting. (The Morningstar 500 is a list of funds with strong fundamentals that I curate with Morningstar analysts for the Morningstar FundInvestor newsletter.) Polen Growth POLRX is down 13.2% for the year to date because of its big software weighting. Morgan Stanley Institutional Growth’s MSEQX 12.8% decline is due to names like AppLovin. Baron Growth BGRFX has dropped 10.6% as names like IT advisor Gartner have led it lower. In all, 57 of the 500 funds are in the red this year.

But other areas are just fine, especially small value, where you’ll find insurance companies, REITs, and widget makers. The leader is actually a value-leaning emerging-market fund, however. Cullen Emerging Markets High Dividend CEMDX is up 18.4% thanks to, believe it or not, tech stocks like Samsung and Taiwan Semiconductor TSM; chipmakers and others in the supply chain of AI are thriving. Harbor Small Cap Value HASCX is up 17.4%, thanks to industrials and energy stocks, many of which have 50% gains on the year. Royce Premier RYPRX is up 16.5% with the help of a 35% industrials stake. Invesco Small Cap Value VSCAX has rallied 13.9% with help from the likes of technical instruments maker MKS MKSI. Vanguard Energy VGENX has gained 13.8%.

Overall, the stock and bond markets are slightly positive for the year, so diversified portfolios have yet to sustain a severe blow.

And that is the biggest lesson of the AI-driven software rout: stay diversified.