Software Sector Downturn: European Firms Affected?

The Software Sector Faces a Major Sell-Off

The software sector is undergoing its most severe market downturn since the 2008 financial crisis, but this time, the cause is not a banking collapse. Instead, it's the rapid development and adoption of artificial intelligence (AI) that has triggered widespread concern among investors.

In January, the U.S. software sector experienced a 14.5% drop, marking its worst monthly performance since October 2008. The sell-off intensified in early February, with an additional 10% decline within just two weeks. This sharp decline has raised questions about the long-term viability of traditional software business models in the face of AI advancements.

Investor Concerns Over AI’s Impact

At the core of the current turmoil is growing investor anxiety. Many are worried that AI tools may not only enhance existing software products but could also erode parts of the subscription-based business models that have fueled the sector's growth for over a decade. This fear has led to a reevaluation of the value proposition of many software companies.

Several high-profile companies that were once seen as leaders in the AI space have seen dramatic declines. Unity Software, which provides tools for video game developers, cybersecurity firm Rapid7, and customer engagement platform Braze have each lost more than half their market value since the start of the year. Even industry giants like Palantir, Salesforce, Intuit, and ServiceNow have experienced significant drops, with shares falling by around 30% year-to-date.

One key event that accelerated the sell-off was the unveiling of new enterprise plugins for Anthropic’s Claude AI assistant in January. This announcement prompted investors to question whether traditional software platforms would still be necessary if AI could perform similar functions.

European Software Sector Under Pressure

Europe’s software sector, valued at roughly €300 billion, is heavily concentrated in a few major companies. This concentration makes every percentage drop more visible and impactful. Germany’s SAP, the largest European software company with a market capitalization of around €200 billion, has seen its shares fall by approximately 20% year-to-date. Since reaching a peak in February 2025, SAP has lost about 40% of its value, wiping out €188 billion in market value alone.

SAP is heading for its ninth consecutive month of decline, a rare occurrence in over 30 years of trading. This trend highlights the deepening concerns about the future of the sector.

France’s Dassault Systèmes, known for its 3D design and engineering platforms, has also faced challenges, with shares dropping around 25% since the start of the year. Similarly, the British accounting software provider Sage Group has fallen about 25% year-to-date, while RELX, a British information and analytics group, suffered a sharp 17% single-session drop earlier this month.

Mid-Sized Firms Feel the Strain

Smaller software companies are feeling the pressure even more acutely. These firms often have narrower client bases and less diversified revenue streams, making them more vulnerable to shifts in investor sentiment. France’s Sidetrade, which uses AI to help companies manage order-to-cash processes, has fallen nearly 50% since the start of the year, making it one of the hardest-hit names in the European software space.

Sweden’s Lime Technologies, Denmark’s cBrain, Norway’s LINK Mobility Group, and SmartCraft have all experienced significant declines, with losses ranging from 32% to 38%. French group 74Software, specializing in API management and digital finance integration, has also recorded a steep decline.

Market Uncertainty and Expert Opinions

Experts remain divided on whether the current sell-off represents a temporary correction or a more structural shift in the software industry. Jensen Huang, CEO of Nvidia, has dismissed the idea that AI will replace software as "the most illogical thing in the world," arguing that AI will enhance existing systems rather than eliminate them.

Wedbush Securities has suggested that markets are pricing in an "Armageddon scenario" that does not align with corporate reality. JP Morgan strategists have similarly noted that investors are discounting worst-case disruption scenarios that may not materialize in the near term.

Veteran Wall Street investor Ed Yardeni has observed a shift from "AI-phoria to AI-phobia," indicating that while valuations may now appear more compelling, earnings expectations may not yet reflect the potential slowdown facing software companies.

However, some experts caution that there are long-term risks. Goldman Sachs strategist Ben Snider has warned of "long-term downside risk," drawing parallels with industries such as newspapers and tobacco that underestimated structural change. He highlighted a fundamental market rotation, with investors exiting AI-exposed software stocks and reallocating capital towards cyclical and value-oriented sectors.

What Comes Next?

The central question remains: is this a necessary repricing of a sector that had benefitted from years of elevated valuations, or the early stages of a more structural reset driven by AI?

For investors, the current sell-off goes beyond quarterly earnings or interest rate expectations. It reflects a deeper uncertainty about how value will be created and captured in an AI-driven economy.

If AI tools reduce the need for multiple layers of enterprise software, margins and pricing power could come under pressure. However, if AI enhances productivity within existing platforms, today’s correction may prove excessive.

History suggests that technology transitions rarely eliminate entire sectors. More often, they reshape competitive hierarchies. Some companies are likely to emerge stronger, while others may struggle to defend pricing power or relevance.

The software industry is not disappearing overnight. But its winners and losers are likely to look very different from those of the past decade.