AI Panic Hits Software Stocks as Fears of Automation Spark Rotation—Is the Tech Boom Over?

If you thought the AI narrative was going to lift all tech boats forever, this week’s price action was a cold splash of reality. The market’s new obsession isn’t which company will harness AI to dominate, but which companies will be rendered obsolete by it. Software stocks, once the darlings of the growth trade, are suddenly the punching bag of every macro desk with a terminal and a grudge.

The trigger? A fresh wave of AI-driven automation tools that have traders asking whether the entire software sector is about to be eaten by its own creation. The New York Times headline says it all: “Fear of AI Replacing Software Makers Hits Stocks.” That’s not just clickbait. It’s the market’s new base case.

XLK (the Technology Select Sector SPDR Fund) is stuck at $140.19, refusing to budge even as the broader market whipsaws. For a sector that’s been the engine of every rally since 2020, flatlining is a warning sign. The rotation out of tech is picking up speed, with growth managers suddenly “pretty comfortable” with current valuations, according to Gabelli Funds’ John Belton. Translation: they’re not buying more.

The backdrop is getting dicey. The S&P 500 is bouncing, but tech is lagging. AI, which was supposed to be the sector’s savior, is now the bogeyman. Every new AI tool announcement is met with a sell order, not a bid. The narrative has flipped from “AI will make software companies more profitable” to “AI will make software companies irrelevant.”

Historical context matters here. Remember 2000? The market loved tech, until it didn’t. When the narrative turns, it turns fast. The current setup is eerily reminiscent of late-cycle rotations, where the winners start to underperform and the laggards (energy, anyone?) catch a bid. The difference this time is that AI is both the disruptor and the disruption.

The real story is that the market is finally pricing in the risk that AI is a net negative for software, not a tailwind. That’s a sea change. For years, every dip in tech was a buying opportunity. Now, every rally is a chance to lighten up. The risk/reward has flipped.

Strykr Watch

XLK is glued to $140.19, with support at $138.50 and resistance at $142.00. RSI is in no-man’s land, hovering around 48. The 50-day moving average is rolling over, and the 200-day is flattening. That’s not bullish. If XLK breaks below $138.50, the next stop is $135.00. Above $142.00, the bulls might have a shot at reclaiming the narrative, but the path of least resistance is lower.

Options flows are skewed to the downside, with put/call ratios at multi-month highs. Volatility is subdued for now, but the setup is ripe for a spike if support cracks. Keep an eye on earnings guidance from software names, one disappointing outlook could be the domino that tips the whole sector.

Risks are stacking up. If AI adoption accelerates and software margins compress, the sector could see a rerating. If the Fed stays hawkish or macro data rolls over, growth stocks will be the first to feel the pain. But the biggest risk is narrative-driven: if the market decides that AI is a net negative, the selling could snowball.

On the opportunity side, the best trades may be tactical shorts on software names with high AI exposure and stretched valuations. Alternatively, look for rotation plays, long energy or industrials against tech. For the brave, a bounce off $138.50 support could offer a quick long, but keep stops tight.

Strykr Take

The tech boom isn’t over, but the easy money is gone. AI is now a risk, not a reward, for software stocks. The rotation is real, and the pain trade is lower. If you’re still overweight tech, it’s time to rethink your exposure. The market is telling you something. Listen.

Strykr Pulse 42/100. Sentiment is turning bearish as rotation accelerates and technicals deteriorate. Threat Level 3/5. Downside risk is rising as the narrative flips negative.