For the first time, the high-multiple software industry faces a potential existential threat from AI. Even the possibility of disruption is enough to compress valuations, causing massive dispersion where indices look calm but underlying sectors are experiencing extreme rotation.

The recent software stock drawdown is not about poor current performance; many companies are still beating earnings. Instead, the market is pricing in a massive "terminal value risk" from AI, valuing companies as if they will decline in perpetuity, creating a historic disconnect between current fundamentals and long-term valuation.

AI's ability to generate software at near-zero marginal cost is erasing the scarcity premium that propelled software stocks for over a decade. This realization is causing a massive capital rotation out of software ETFs and into tangible, scarce assets like metals and commodities.

The downturn in software stocks isn't tied to current earnings. Instead, investors are repricing the entire sector, removing the premium they once paid for its perceived safety and stable, long-term contracts, which are now threatened by AI disruption.

While large-cap tech stocks are showing weakness, cyclical sectors like small caps, consumer discretionary, and restaurants are breaking out. This suggests capital is flowing from concentrated, high-valuation names to broader, economy-sensitive assets, indicating a significant shift in market leadership.

If AI is truly transformational, its greatest long-term value will accrue to non-tech companies that adopt it to improve productivity. Historical tech cycles show that after an initial boom, the producers of a new technology are eventually outperformed by its adopters across the wider economy.

The dominant investment theme is shifting. For two decades, capital favored intangible assets like fintech and cloud computing. Now, investors are rotating into 'real things' with significant supply constraints, representing a complete reversal of the prevailing trend.

The recent software stock wipeout wasn't driven by bubble fears, but by a growing conviction that AI can disintermediate traditional SaaS products. A single Anthropic legal plugin triggered a massive sell-off, showing tangible AI applications are now seen as direct threats to established companies, not just hype.

Investor uncertainty about the long-term viability of software business models due to AI is causing a fundamental shift in valuation. Instead of paying a premium for future growth, investors are now demanding immediate returns like dividends, effectively treating established software firms as value stocks rather than growth stocks.