U.S. software stocks are under pressure as investors reassess how artificial intelligence could reshape business models and undermine long-standing revenue predictability. The selloff reflects growing concern that AI-driven tools may compress valuations across software, data and analytics companies rather than pose an immediate existential threat.
BNN Bloomberg spoke with Mike O’Rourke, chief market strategist at Jones Trading, about how AI disruption fears are prompting investors to demand higher risk premiums, unwind premium valuations and rotate away from software toward more defensive sectors.
Key Takeaways
- Investors are repricing U.S. software stocks as AI raises long-term uncertainty around business models rather than immediate revenue threats.
- Premium valuations are coming under pressure as predictable recurring revenue streams are no longer viewed as risk-free.
- AI-powered tools highlight how faster, more nimble competitors could challenge legacy firms over time.
- Weakness in software is occurring alongside signs of fatigue among former semiconductor leaders.
- Investor rotation toward AI-resistant sectors such as consumer staples, utilities and transportation reflects rising demand for stability.
Read the full transcript below:
MERELLA: Let’s pick up on the selloff in tech stocks, especially software. We’re joined by Michael O’Rourke, chief market strategist at Jones Trading. Mike, thanks for your time.
MICHAEL: Thank you.
MERELLA: The tool Anthropic has developed to help with legal contracts — is it the disruptor the market seems to think it is?
MICHAEL: I’m not sure it’s the disruptor the market thinks it is. I think it’s more about the market seeing the risk and the potential. We’ve heard about AI agents for the past month or two. We had Microsoft earnings last week, where cloud growth and reserve growth were a little less than expected, given the amount of capital they’ve spent. At the same time, they’re investing heavily in AI agents.
So you’re seeing this narrative start to play out and take shape. Then, of course, you have this AI agent announcement from Anthropic. When you see something like Thomson Reuters — which is a large media and financial services company that owns Westlaw — you saw that stock sell off. People can easily start to connect that to other financial services companies involved in data and analytics.
The other important aspect, especially in the broader software and cloud space, is that these stocks tend to have very predictable annual recurring revenues. That makes them attractive to investors, who like the predictability and are willing to pay premium multiples for it. They also tend to have strong profit margins. Those premium valuations are now starting to come out of these stocks, and I think that’s what we’re seeing priced into the market.
MERELLA: Companies with their own protected data archives — you mentioned Thomson Reuters — are they at risk if that information isn’t available to AI?
MICHAEL: No, I would agree with you that proprietary information is an edge. I don’t think anyone is under direct threat at this moment. It’s more about the market saying things could change in the future.
For the past couple of years, we’ve talked about AI changing the world and forcing us to look at things differently. Now you’re seeing small seeds being planted — things that may emerge and do things in new ways. A new competitor, using AI-enabled coding that’s faster and more effective, could be more nimble and quicker to market than a large legacy institution.
Of course, large legacy institutions can innovate and try to compete. But this really comes back to premium valuations coming out of these names.
MERELLA: Some say certain software companies are more vulnerable than others. Do you agree, and where does that split occur?
MICHAEL: I think your previous guest, Mr. Green, made some good points. There are smaller areas where you could be more vulnerable. But I don’t want to put a target on anyone’s back at this point, because it’s still very early.
We don’t know what these agents will look like, how things will play out, or how large companies will respond. What we do know is that there’s more risk in this space than investors have assumed over the past five to 10 years, when valuations steadily expanded.
MERELLA: With tech and software down, do you think there’s stabilization ahead? What would that look like?
MICHAEL: I think the market is revaluing these groups. Investors need a higher risk premium to acknowledge that there’s some degree of risk to certain business models. That process is playing out now.
I also believe we hit an equity bubble in the United States last year. Part of this is that unwinding. Recently, this trade has shown up in two places: semiconductors moving higher — especially memory chips, where demand is strong and supply is tight — and software stocks moving lower.
Memory stocks remain relatively strong, but you’re starting to see weakness in other semiconductor leaders. AMD is down today, and Nvidia has come off this week. Investors are increasingly questioning whether things will play out as quickly or as strongly for everyone as they have over the past two years.
MERELLA: How should investors think about positioning now? Be more selective within tech, or rotate elsewhere?
MICHAEL: Investors should always be selective. If you look at the top 20 stocks by market capitalization in the S&P 500 — what I call the “20 titans” — they’re trading at extremely expensive multiples. Even excluding Tesla, they’re around 27 to 28 times forward earnings.
That’s very narrow and expensive leadership. You’re seeing more value in areas like consumer staples. What’s been interesting over the past several days is a rotation into what I’d call AI-resistant names — consumer staples, transportation, utilities and some real estate-related stocks.
Given how expensive mega-cap stocks are, that rotation makes sense to me. Personally, I favour consumer staples right now.
MERELLA: Michael O’Rourke, chief market strategist at Jones Trading. Thanks for joining us.
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This BNN Bloomberg summary and transcript of the Feb. 4, 2026 interview with Michael O’Rourke are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
