Software Stocks Face Historic Rout as AI Disruption Collides With Tech Layoff Tsunami

The tech sector is not supposed to be boring. But right now, boredom is the least of its problems. In a market that has gotten used to every dip being a buy, the past week has delivered something different: a structural software selloff so severe that even Dan Ives, a man who has never met a cloud stock he didn’t like, is calling it unprecedented. The selloff comes as layoffs in tech hit their highest level since 2009, with Challenger reporting a 205% jump in job cuts from December. If you’re looking for a sign that Silicon Valley’s invincibility cloak is fraying, this is it.

The numbers are ugly. The XLK Technology Select Sector SPDR Fund sits at $135.6, flat for the day but battered over the past month. Software names are bleeding out, with some high-flyers down -20% or more from recent highs. The S&P 500, so often the market’s safety net, is now in the red for the year, according to the Wall Street Journal. The culprit? Weak job data, a deepening AI anxiety, and a sense that the easy money era of tech is over. In a world where every SaaS company is suddenly fighting for survival against a new wave of AI tools, the market is asking hard questions about who gets disrupted next.

Dan Ives of Wedbush, usually the sector’s hype man, told YouTube he’s never seen a structural software selloff like this in 25 years. Yet, he’s still bullish on tech stocks. That’s a bold call when even the most entrenched names are getting repriced lower on fears that AI will eat their lunch. CNBC’s recent “vibe-coding” experiment, where they used AI to replicate Monday.com’s tools, underlines the existential threat: if your moat is a few lines of code, the market is going to test just how deep that moat really is.

Layoffs are not just a tech story. Healthcare and transportation are also slashing jobs, but tech is the epicenter. The Challenger report shows that job cuts in tech are up 205% from December. That’s not a cyclical blip. That’s a sector in the throes of a structural reset. The AI narrative, once a tailwind, is now a source of volatility. Barron’s calls it an "AI knife fight", and right now, the knives are out for software stocks.

The context here is critical. For a decade, software stocks were the market’s darlings. High margins, sticky revenue, and a seemingly endless runway for growth. But the AI revolution has changed the calculus. Investors are no longer willing to pay 30x sales for companies that could be disrupted by the next large language model. The result is a violent repricing, with multiples compressing and capital fleeing to the perceived safety of hardware, infrastructure, and even old-economy sectors.

It’s not just about valuations. The layoffs are a signal that management teams see real risk ahead. Cost-cutting is the new growth strategy, and that’s never a good sign for a sector built on relentless expansion. The spillover is hitting everything from cloud infrastructure to cybersecurity. Even the mega-caps are not immune. Microsoft, Google, and Amazon have all announced layoffs or hiring freezes. The message is clear: the era of easy growth is over, and only the strong will survive.

This is not the first time tech has faced an existential crisis. The dot-com bust, the 2008 financial crisis, and even the COVID crash all tested the sector’s resilience. But this time feels different. The threat is not just macro, it’s technological. AI is not a cyclical headwind. It’s a structural force that could reshape the entire software landscape. The market is struggling to price that risk, and the result is volatility on a scale not seen in years.

The cross-asset correlations are telling. As tech sells off, money is flowing into defensive sectors and even commodities. The DBC commodity ETF is flat at $23.76, but that’s outperformance when tech is melting down. The S&P 500’s correlation with tech has broken down, with other sectors holding up even as software gets pummeled. This is classic rotation behavior, and it suggests that the pain in tech is not just a blip, it’s a regime shift.

So what’s the real story here? The market is repricing risk in a sector that has not had to deal with real disruption in a decade. The AI narrative, once a reason to buy, is now a reason to sell. Investors are asking hard questions about who wins and who loses in the new world order. The layoffs are a symptom, not the cause. The real issue is that the market no longer believes in the inevitability of software’s dominance.

Strykr Watch

Technically, XLK at $135.6 is clinging to a key support zone. The 200-day moving average sits just below at $134, and a break below that could open the door to a test of the $130 level. RSI is hovering near 38, suggesting the sector is approaching oversold territory, but momentum remains negative. Volume has spiked on down days, a classic sign of institutional selling rather than retail panic. Watch for a failed bounce at $138, that’s where the sellers have been reloading. If the sector can reclaim $140, the narrative could shift, but right now, the path of least resistance is lower.

The options market is pricing in elevated volatility, with implied vols for leading software names at multi-month highs. Put-call ratios have surged, and skew is heavily tilted to the downside. This is not just hedging, it’s outright bearish positioning. The risk is that a breach of $134 triggers another round of forced selling, as funds de-risk and algos chase momentum lower.

The bear case is clear. If the layoffs accelerate and earnings revisions start to roll in, the sector could see another leg down. The bull case? Oversold conditions and a contrarian snapback if the market decides the selloff is overdone. But with AI anxiety running high and macro headwinds intensifying, catching the falling knife is not for the faint of heart.

The opportunities are there for traders with a strong stomach. Selling rips into resistance has worked, and buying capitulation lows could pay off if the sector finds a bottom. But the risk of a deeper unwind is real. Keep stops tight and position sizing small. This is a market that rewards discipline, not heroics.

Strykr Take

The software sector is in the midst of a structural reset. The AI narrative has flipped from tailwind to headwind, and the market is repricing risk in real time. The layoffs are a symptom of deeper issues, and the technicals suggest more pain ahead if key support levels break. For traders, this is an environment that demands agility and discipline. The easy money era is over. Welcome to the new normal.