The S&P 500 Index has surged more than 21% over the past 12 months and is up 7% year to date, adding trillions of dollars in market value. The rally has been fueled by the ongoing artificial intelligence boom, which has driven corporate earnings growth to multi-year highs.
Top software stocks are plunging this year
A closer look at its top gainers and laggards shows something unique. Software stocks like Intuit (INTU), Trade Desk (TTD), Adobe (ADBE), and Salesforce (CRM) are among the top laggards. They have all plunged by over 43% this year and by over 50% from their all-time highs.
Intuit stock has slumped by 67% from its highest point in July last year. The Trade Desk stock has slumped by 87% from its all-time high, erasing the gains made in 2024, when it was one of the best-performing companies in the United States.
Adobe stock sank to $196, down by over 70% from its record high, while Salesforce has plummeted by 57% in this period. Other software companies like ServiceNow, Palantir, Autodesk, AppLovin, and Veeva have also retreated sharply this year.
Altogether, the iShares Expanded Tech-Software Sector (IGV) has slumped in the past four consecutive weeks. It has dropped by 27% from its highest point on record.
Top software stocks have plunged this year | Source: TradingView
SaasPocalypse fears and valuation reset
The ongoing retreat in software stocks is happening because of the ongoing SaasPocalypse fears and the valuation reset.
SaasPocalypse is a phenomenon in which investors believe that software companies will be disrupted by artificial intelligence tools like Claude, Harvey, and Numeric.
Most of these companies have boosted their investments in the AI, creating tools that they hope will complement their solutions. For example, Salesforce has launched Agentforce, which involves building and deploying autonomous AI agents that can perform work across areas like sales, customer service, marketing, and commerce. Intuit launched Intuit Assist, an AI-powered financial assistant that helps companies to automate their accounting, tax preparation, and marketing.
READ MORE: Salesforce stock hits 52-week low amid record losing streak and AI fears
Workday launched Workday Illuminate, which helps companies across various industries like HR, finance, and planning. All other software firms like ServiceNow, Trade Desk, and Figma have all launched similar solutions.
Still, these products have not led to a substantial revenue growth to these companies. For example, analysts believe that Adobe’s revenue growth will be 11% this year, followed by 8% in the next one. Workday’s growth is expected to be 11.6% this year and 10% next year.
The same is happening across other software companies in the United States, like ServiceNow, Trade Desk, and Figma.
Software stocks are also falling because of the ongoing valuation reset in the industry. For a long time, these were among the most expensive companies to own, and investors are now re-evaluating their valuations.
A good example of this is in the private markets, where companies like Medallia, Pluralsight, Qualtrics, and Proofpoint have led to a sharp decline in their valuations.
Thoma Bravo, a private equity company that focuses on software, bought Medallia in a $6.4 billion deal in 2021. Its equity has now been wiped out as creditors like Blackstone, KKR, and Apollo took over.
The same happened with Pluralsight, which went public in 2018 and was then acquired in a $3.8 billion deal by Vista Equity Partners. Ultimately, its value collapsed, and Vista was forced to have a $3 billion write-down.
Will software stocks rebound?
The question among investors is on whether software stocks will rebound in the near future. History shows that these companies will ultimately bounce back as they have become highly undervalued. For example, Adobe has a forward PE ratio of 8, while Workday has a multiple of 10. Salesforce has a forward multiple of 10, while The Trade Desk has a multiple of 9.
However, the recovery is likely to take time. It will also occur as investors begin rotating out of semiconductor and memory stocks once their rally fades.
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