Even the software sector wasn’t immune from a broad-based technology selloff in the stock market Friday.
Investors had been rotating into the software sector earlier in the week, deeming these stocks to be compelling alternatives to highflying chip stocks that were seen as more vulnerable to concerns about the sustainability of artificial-intelligence spending.
But semiconductor and software stocks fell in tandem on Friday, leaving tech investors with nowhere to hide. The iShares Expanded Tech-Software Sector exchange-traded fund, a proxy for the software sector, closed down 4.8%, while the iShares Semiconductor ETF was off 4.1%.
Within the software sector, ServiceNow’s stock finished down 4% and Oracle’s stock closed 5% lower. Shares of Salesforce lost 2% on the day, while Twilio’s stock was the S&P 500’s biggest loser with its 10.6% decline.
D.A. Davidson analyst Gil Luria told MarketWatch that what used to be a negative correlation between chip stocks and software stocks is “no longer a major factor in the market.” He said that Friday’s broad-based technology selloff was “not leaving any stock untouched.”
“Investors no longer view AI progress as bad for software and are treating individual software companies based on their specific prospects,” he said.
Morningstar analyst Luke Yang told MarketWatch there wasn’t one single factor gripping the market on Friday, as investors seemed to be digesting a broad breakdown of faith in the AI trade this week.
The “wide range of potential outcomes” for companies tied to the AI trade has made it difficult for investors to maintain faith in AI-exposed stocks, he said — whether it be the indebted neocloud provider CoreWeave, chip giant like Nvidia or software and cloud company Oracle.
Cybersecurity stocks were also caught up in the software selloff on Friday after Palo Alto Networks — which sells firewall products to corporate customers — released an advisory disclosing a security vulnerability earlier this week. The Cybersecurity and Infrastructure Security Agency, which lies within the U.S. Department of Homeland Security, added Palo Alto Networks to its catalog of known security vulnerabilities.
The Amplify Cybersecurity ETF closed down 4% on Friday, with Palo Alto Networks and CrowdStrike Holdings shares each falling more than 7%.
One issue could be the specter of interest-rate hikes, which affects technology companies across the board that have to borrow money.
The “data-center buildout requires capital which is becoming more expensive,” Luria said, as higher rates mean higher funding costs for companies investing heavily in AI infrastructure.
Software stocks are also sensitive to rate hikes as their valuations are often tied to cash flows years into the future, and higher interest rates change the way those are valued. And many software companies need to borrow money as well.
Financial-technology stocks may be feeling the pain as well from fears of an imminent rate hike, as higher rates mean higher default risk for lenders, Mizuho anlayst Dan Dolev told MarketWatch.
Speaking Friday at the International Monetary Fund and World Bank’s annual meeting in Bangkok, Federal Reserve Chairman Kevin Warsh declined to share any expectations for the central bank’s upcoming rate-setting meeting.
Comments