This AI selloff is about survival

I’ve seen enough tech cycles to recognise when markets are merely correcting excess and when they are confronting something more fundamental. What investors are grappling with now belongs firmly in the second category.

Close to $1 trillion has been stripped from software and broader tech valuations in days. Speed explains part of the shock and meaning explains the rest. Markets are reassessing whether large parts of the software industry will retain the same economic relevance in an AI-first world.

For two years, AI was sold as an upgrade. It would sit alongside existing products, enhance workflows, and justify higher prices. Incumbents embraced that narrative because it preserved the status quo. Investors accepted it because disruption felt distant.

But this comfort has evaporated.

Recent advances made something unavoidable clear to markets: AI is no longer just augmenting software, it’s starting to compete with it directly. Tasks that once required layered platforms, licences, and long contracts are being completed faster and more cheaply by AI systems that operate outside traditional structures.

Once investors internalised this shift, repricing became inevitable.

Software stocks led the decline because they face the most immediate exposure. Many business models depend on being the indispensable layer between users and outcomes.

When AI begins delivering outcomes itself, that position weakens. Markets moved quickly because they understand how fast demand curves can change once alternatives reach acceptable quality.

The absence of earnings warnings didn’t slow the selloff because markets were never focused on last quarter. Capital prices future durability. When confidence in durability cracks, valuations adjust long before revenues reflect the pressure.

Credit markets confirmed the signal. Loans tied to tech firms slipped into distressed pricing without a wave of defaults or liquidity stress. Credit investors do not make that move lightly. They are expressing doubt about long-term cash generation, not short-term solvency. Equity investors followed with speed and force.

Some selling has clearly gone too far. High-quality businesses with strong customer retention and real switching costs are being punished alongside weaker operators. That creates opportunity. Markets always overshoot when they move this fast.

Still, pretending this episode is driven by fear alone would be a mistake. Artificial intelligence introduces substitution risk on a scale that markets have rarely had to price in real time. Some software categories will shrink. Some pricing models will fail. Some companies will discover that what they sell no longer commands the same premium once AI alternatives become good enough.

Investors are right to take that seriously.

This is the early phase of a sorting process that will define the sector for years. Companies that control critical data, infrastructure, or deeply embedded systems will defend their relevance. Those that rely on convenience, interface, or incremental functionality face sustained pressure. Markets are beginning to draw that distinction now, and it will sharpen.

Volatility will remain elevated because assumptions are still adjusting. Expectations about adoption speed, margin stability, and competitive barriers are being rewritten. Confidence will swing, but directionally the shift is clear.

For two years, investors spoke about AI changing how business works. Markets have now decided that conversation is over, with the focus turning to consequences. A trillion-dollar selloff feels dramatic because it marks recognition, not a bolt out of the blue.