Evaluating AI Disruption Risk in the Stock Market

Recent news about updates to the Claude AI platform caused the outlook for software stocks to plummet. Mitch looks at how investors should gauge AI disruption risk.

Is “AI Disruption Risk” Starting to Show Up in the Stock Market? It did not seem like a major news story at first glance. The AI research lab, Anthropic, announced updates to its Claude platform, including expanded “agent” capabilities. The demonstration signaled to markets that AI tools could increasingly serve as a kind of centralized interface for knowledge work. It could automate coding, legal review, and even operational workflows at a high level of sophistication. Generally speaking, it’s what we’d expect in the next phase of AI development. But then came the sharp slide in software stocks.1 What was once seen as a tool to supercharge productivity and product development suddenly became a disruption risk. Investors who were previously underwriting 15–20% medium-term revenue growth for many key names in the software space were now pricing many of these same companies closer to 5–10%. The question is, what exactly changed? Are You Prepared for the Market’s Next Moves? AI is moving fast, and the market is noticing. What once looked like a productivity boost is now raising questions about risk, and it’s shaking up software stocks. So, what does that mean for investors right now? Our February Stock Market Outlook Report 2 breaks down the latest shifts, which companies are most affected, and what to watch next. Inside, you’ll learn: Asset allocation guidelines for today’s market environment Expert forecasts for inflation, rates, and economic trends Industry tables and rankings to help you spot opportunities Buy-side and sell-side consensus insights at a glance And much more! If you have $500,000 or more to invest, claim your complimentary copy of the report and see how shifting market trends could influence opportunities in the months ahead. IT’S FREE. Download our latest February Stock Market Outlook Report 2 In many cases, the answer was not projected 2026 earnings. Though the headline risk gripped the markets, there was no broad deterioration in reported revenue, cash flows, or operating margins. Importantly, earnings guidance also did not signal structural impairment across the industry. In my view, what changed seemingly overnight was sentiment—specifically, long-dated assumptions about how AI may reshape competitive dynamics over time. It is fair to say that over the past two years, software valuations expanded meaningfully as investors assumed AI would accelerate growth, improve productivity, and entrench market leaders. Multiples reflected those expectations. But now we’re seeing the reverse, where the fear is that AI will commoditize certain software layers, compress pricing power, and erode moats. What stands out to me is how much of this debate is rooted in forecasting scenarios that may or may not unfold years from now. There is a great deal of modeling the future, but very little concrete financial evidence, at least at this stage, that these risks are showing up in reported results. To be sure, markets constantly discount the future. That’s what we expect markets to do. But when expectations swing rapidly based on hypothetical scenarios that may unfold years from now, valuations can detach from current fundamentals, in both directions. I think that’s what we saw in software stocks earlier in the month. Disruption risk is real in technology, but we want to identify it in financial statements, not by making wagers. A focus on earnings when selecting companies for a portfolio will unearth early signs of decelerating revenue growth, shrinking margins, falling retention rates, and weaker free cash flow. Today, we are not broadly seeing that, but I certainly am not ruling out the possibility that we will sometime in the future. Instead, we are seeing investors rapidly adjusting the terminal growth assumptions embedded in valuation models. When you move an implied growth rate from 15–20% down to 5–10%, the math alone can justify a sharp decline in stock prices, even if near-term earnings remain intact. This does not mean the market is wrong, but I do think it means the market is repricing uncertainty. To me, that’s a sentiment trade, not a fundamental trade. This market ‘event’ should also serve as a reminder to investors of why diversification is so important, which is a theme I continually revisit in this column. In 2026, we are seeing signs of market broadening, with small-cap stocks showing relative strength, cyclical sectors outperforming again, and capital generally rotating into areas that were previously overshadowed by mega-cap technology leadership. When portfolios are properly diversified across sectors, market caps, and styles, investors participate in those shifts rather than being overly exposed to any theme. The software selloff becomes less of a major story and more of a contained episode within a broader market that continues to find strength in other areas. Bottom Line for Investors AI disruption risk is real, full stop. But it should be evaluated through earnings and cash flow, not solely through changes in sentiment. In my view, the recent selloff in software stocks appears driven more by shifting long-term assumptions than by collapsing fundamentals. Innovation will continue, competitive dynamics will evolve, and some business models will prove more durable than others. But history shows that reacting to rapidly changing narratives, without confirmation in the numbers, often leads to volatility rather than value creation. Staying grounded in fundamentals and maintaining diversification remain the more durable strategies for navigating technological change. To help you stay focused on what really matters, our February Stock Market Outlook Report 3 dives into how long-term AI assumptions are shifting valuations, which sectors are showing strength, and how investors can use diversification to navigate market volatility. Inside, you’ll find: Asset allocation guidelines for today’s market environment Expert forecasts for inflation, rates, and economic trends Industry tables and rankings to help you spot opportunities Buy-side and sell-side consensus insights at a glance And much more! If you have $500,000 or more to invest, claim your complimentary copy of the report and see how shifting market trends could influence opportunities in the months ahead. About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Wall Street Journal. February 24, 2026. 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Any projections, targets, or estimates in this report are forward looking statements and are based on the firm's research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation. Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein. The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor's. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index. The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. Zacks Investment Management 101 N. Wacker Drive Suite 1500 Chicago, Illinois 60606 If you do not wish to receive further email solicitations from Zacks on behalf of its partners, please click here to unsubscribe.