US software shares extend declines on mounting fears over AI disruption

By Medha Singh Feb 5 (Reuters) – Shares of U.S. software and data services companies extended their steep slide into a seventh session on Thursday as investors continued to pull back on fears that fast-advancing artificial intelligence tools could upend the sector. The S&P 500 software and services index dropped 2.8% and was on track to lose more than $950 billion in market value since January 28. Some of the big tech names that were swept away by the rout included ServiceNow, which fell 4%, Salesforce, which slipped 3.3%, and Microsoft , which shed 2.6%. Canada-based Thomson Reuters, which suffered a record one-day plunge earlier this week after investors raised concerns that a new plug-in from Anthropic's Claude could disrupt its legal business, erased early gains to fall 4.9% despite raising its dividend and reporting fourth-quarter results largely in line with estimates. The company, which owns the Westlaw legal database and the Reuters news agency, said it was seeing tangible benefits from AI investments. "The uncertainty around the eventual impact of AI means near-term earnings results will be important signals of business resilience, but in many cases insufficient to disprove the long-term downside risk," said Ben Snider, Goldman Sachs' chief U.S. equity strategist. ROTATION OUT OF TECH INTENSIFIES The software selloff has come alongside a broader rotation out of technology and into value-oriented sectors such as consumer staples, energy and industrials, which were laggards in the bull market that began in October 2022. Reflecting the bearish mood, short interest on mid- to large-cap software companies has been rising over the past three months, according to data analytics company Ortex, with cybersecurity and SaaS (Software as a Service) firms seeing the biggest jump in such bearish bets. Goldman Sachs data showed a sharp recent decline in hedge funds' exposure to software companies, although the funds remained net long on the industry. UNWINDING OF LEVERAGED POSITIONS ADD TO PRESSURE The selloff also spread to sectors exposed to software companies such as asset management firms on concerns they extended loans through private credit. Alternative asset manager Blue Owl, which was on track for its eleventh straight session of declines, said its total exposure to the software sector accounts for 8% of its assets under management on the post-earnings call. The performance of overseas tech stocks was mixed. Shares of London Stock Exchange Group ended 5.8% higher, while data analytics firms RELX rose 2.9% and the Netherlands-based Wolters Kluwer gained 2%. In contrast, India's software exporters index, which houses names such as HCL Technologies and Wipro, slipped 0.7%, a day after plunging 6% in its worst session in nearly six years. Alphabet's plan to nearly double its capital expenditure further stoked concerns over payoff from the massive AI investments and exacerbated the Big Tech selloff. VOLATILITY SPREADS ACROSS MARKETS Market volatility has shot up across equities, commodities and digital assets in recent weeks, which market participants attribute to leveraged investors being forced to rapidly unwind positions. Precious metals gold and silver resumed their slide on Thursday after a historic rout earlier this week, and bitcoin slipped below $70,000 for the first time. "This is a lot of relative bets out there going wrong, and then there's some kind of reset going on in the market internals, but time will tell," John Hardy, Saxo's global head of macro strategy, said on a podcast.  "There's a lot of leverage in this market. We've reached record leverage in terms of margin lending, etc., so forewarned is forearmed." (Reporting by Medha Singh in Bengaluru; additional reporting by Vidya Ranganathan in London and Johann M Cherian in Bengaluru; Editing by Tasim Zahid, Shinjini Ganguli and Anil D'Silva)

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