Dear Reader,
This is Dylan Jovine with Behind the Markets.
Happy Friday.
Today is Friday, February 6th.
Today I want to talk about something important that's starting to show up very clearly in the market — how AI is eating the software sector's lunch.
And in my view, that's a big reason behind the selloff we've seen this week in the Nasdaq.
AI is beginning to chew through large parts of the traditional software business. And it reminds me a lot of what we saw back in 2022 with Ozempic and the weight-loss drugs — before they hit mainstream consciousness.
Back then, you started seeing biotech companies that made obesity-related drugs getting hammered. Early data showed those GLP-1 drugs weren't just effective for weight loss, but for a whole range of related conditions.
Markets moved before the story fully landed.
We're seeing the same dynamic now with AI — and software stocks.
Take this week as an example. Anthropic, which makes the AI app Claude, released a new tool that automates legal drafting and research tasks.
Think about that for a second.
There are entire companies — entire business models — built around doing exactly that.
And Claude is now offering it essentially for free.
So what happened?
Thomson Reuters got hit. LegalZoom got hit.
The London Stock Exchange, which has moved heavily into data and analytics, also got hit.
Many of these stocks fell more than 12% this week.
And it's not just legal companies.
Financial data companies are getting hammered too.
S&P Global.
MSCI.
Intercontinental Exchange.
London Stock Exchange again.
FactSet Research — one of my old favorites that I've owned on and off for years.
All of these companies are under pressure because with AI, you can now build agents that fetch, organize, and analyze the same data — often at little to no marginal cost.
Maybe all you're paying is a subscription to Claude, ChatGPT, or Gemini.
That's astonishing.
The financial and legal data business has been a massive Wall Street cash cow for decades. Extremely profitable.
And now AI is directly threatening that moat.
I also look at companies like Salesforce and Adobe and ask the same question:
What is the competitive response to an AI agent that does much of what you do — for free?
I don't see it yet.
And this isn't theoretical.
At Behind the Markets, we pull data from places like the SEC, S&P Global, and FactSet.
But now we're building AI agents that can pull directly from SEC databases and present the data in minutes — in whatever format we want.
So I have to ask: what is the long-term competitive response for companies like S&P Global or FactSet?
That's going to be very interesting to watch.
Until we see it, I would personally be avoiding every stock I mentioned today.
One of the most important lessons I learned from Warren Buffett is the idea of durable competitive advantage.
People talk about Buffett as a value investor — and he is — but what I didn't fully appreciate until I got older was that durability is the key word.
These companies once had durable competitive advantages.
Then those advantages weakened with the rise of the internet.
Now, in many cases, those advantages are disappearing entirely.
What we're seeing is a major dislocation — a transfer of wealth from traditional software and data companies to a smaller group of AI-native players.
That's why we're not trying to guess which legacy software companies survive this shift.
We're focused on the second wave of AI — the companies being built because of this disruption, not destroyed by it.
We lay out all of our findings in our breakthrough report which can be found here.
That realization is a big reason markets have been under pressure recently.
We've been avoiding software stocks for this exact reason.
Frankly, I see it happening inside our own business.
And for those of you watching who are entrepreneurs — and I know many of our members are small business owners — this part matters.
I told my team very plainly: if we don't adopt AI aggressively, we will get out-competed.
The companies that move faster will save more money, become more profitable, and reinvest those profits into growth.
It may not destroy a business in a year or two — but over time, you fall behind.
So we now have weekly internal meetings focused on one thing:
How are you using AI to make what you do faster, better, or cheaper — ideally all three?
And I guarantee that same conversation is happening all across corporate America right now.
Companies are moving quickly because they don't want to be irrelevant in three to five years.
So until we see credible competitive responses, I would be very cautious with the following names — whether you own them directly, or through ETFs or mutual funds:
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Thomson Reuters
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LegalZoom
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London Stock Exchange
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Adobe
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Salesforce
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S&P Global
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MSCI
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Intercontinental Exchange
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FactSet Research
These are businesses I'd be wary of in the age of AI, until proven otherwise.
Anyway, that's all I have today.
Have a wonderful weekend.
I'll see you Monday.
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