Investing.com — The software sector, once the primary engine of global digital transformation, is facing a significant challenge as “agentic” artificial intelligence tools threaten to disrupt established business models. According to a new Goldman Sachs “Top of Mind” report, the rise of AI capable of autonomous software development has fueled investor fears that the technology may “eat” the very industry that pioneered it, leading to a sharp re-rating of software stocks.
The threat of disruption is real, but many analysts suggest that reports of the death of traditional software may be premature. The consensus among experts is that incumbent software firms possess “moats” that buy them critical time to adapt. Some of their advantages include deep integration into corporate workflows, massive datasets for training proprietary models, and long-standing customer relationships.
“Legacy software companies aren’t standing still,” noted Gabriela Borges of Goldman Sachs. “They are innovating as fast followers… That, combined with their moats, could ultimately leave incumbents in a better place from a soup-to-nuts platform perspective.”
Rather than being replaced, many legacy firms are integrating AI capabilities directly into their existing platforms. They are then able to capture the value of AI without losing market share to new startups.
However, Rick Sherlund of Sherlund Partners cautions that “moats buy incumbents time to adapt, as seen in prior software disruption cycles,” but the question remains “how radical a transformation must they undergo to remain competitive.”
The primary challenge for the tech sector in the near term is stabilizing share prices through consistent earnings. Investors have become increasingly selective, moving away from broad-based software bets toward companies that can demonstrate tangible productivity gains.
Goldman Sachs strategists emphasize that “what it will take to stabilize share prices is earnings stability and a clear path to AI monetization.”
Despite the volatility in equity markets, the analysts noted that stress in software-exposed credit is unlikely to trigger a broader turn in the credit default cycle. They stated that “whether stress in software-exposed credit can catalyze a turn in the credit default cycle is unlikely at this stage, despite the sharp re-rating in equity valuations.”
The mandate for investors is clear: “investors should be selective, in software and beyond.” The AI revolution is creating a bifurcated market where firms that fail to transform their cost structures and product offerings risk being left behind.
