SaaS Sector Among Year's Worst Performers as AI Displacement Fears Continue to Weigh on Valuations
Miles Bennett
The Nasdaq 100 rallied nearly 30% in Q2, yet SaaS missed the ride — the iShares Expanded Tech-Software ETF fell roughly 11% in a single month, and marquee software names are deep in the red for the year. The AI fear has evolved: first it was replacement, now it is whether the money being poured into AI will ever pay off.
Same AI boom — why are chips up and software down?
Chip and memory stocks posted their best quarter on record in Q2, but software-as-a-service (SaaS — cloud software sold on a subscription basis) failed to keep pace.
The worst hit: Intuit −58%, HubSpot −51%, Atlassian −49%, Workday −41%, Salesforce −38%, Adobe −38%. Even Microsoft is down 22% year-to-date.
This means → the market priced almost all AI upside into "the people who make the shovels" (chips, memory) while suspecting "the people who use the shovels" (software companies) could be put out of work by AI itself.
What exactly are investors afraid of?
José Torres, senior economist at Interactive Brokers, notes that the fear has shifted a gear: early in the year, the worry was that AI would directly replace SaaS products; now the worry is that big software companies are spending heavily on AI with no visible payoff.
He points to Microsoft — one of the largest capital spenders in the AI arms race — whose stock is down 22% this year and on track for its worst single-month performance since 2000.
In plain terms = Phase one: "AI kills your product." Phase two: "You spend a fortune on AI and still can't earn it back." Stack both fears together, and valuations buckle.
Beyond AI — what else is dragging software stocks?
Torres adds that expectations of higher interest rates driven by inflation are applying extra pressure on tech and software names whose valuations rest on future cash flows.
After the chip and memory rally, capital is rotating into other parts of the market, and SaaS is on the losing end of that flow.
This reflects a structural tension: the SaaS subscription model itself hasn't changed, but when capital faces "rising rates + uncertain AI returns" at the same time, high-valuation sectors with declining certainty are the first to be trimmed.
Is now the time to buy the dip?
Mark Malek, chief investment officer at Siebert Financial, believes panic may already be overdone — but remains cautious on the near-term outlook.
"I don't think this is the bottom," he says. "The market is questioning the AI trade itself."
This means → the next key test is whether top software companies' AI spending can actually translate into revenue growth. Until that question gets an answer, a broad SaaS re-rating is hard to sustain.
Content is for reference only, not financial advice.