Goldman Sachs compares the current software industry to the newspaper industry, which was disrupted by the internet in the early 2000s, and the tobacco industry, which faced heavy regulation in the late 1990s. Goldman Sachs believes that the decline in valuations reflects not short-term profit fluctuations, but a fundamental doubt about whether the long-term growth and profit margins of the software industry still hold. Only when profit expectations stabilize can stock prices potentially bottom out.

When Wall Street begins to describe software stocks as part of the "newspaper industry," it indicates that the market's fear of the impact of AI has reached an extreme stage.

In a recent report, Goldman Sachs analyst Ben Snider and his team unusually compare the current software industry to the newspaper industry disrupted by the internet in the early 2000s and the tobacco industry facing regulatory challenges in the late 1990s. This analogy itself is enough to illustrate Wall Street's pricing of the "AI impact on software business models."

Goldman Sachs believes that the current decline in valuations reflects not short-term profit fluctuations, but a fundamental doubt about whether the long-term growth and profit margins of the software industry still hold.

Goldman Sachs warns that when the market identifies an industry as facing disruptive risks, the bottoming of stock prices depends on whether profit expectations stabilize, rather than whether valuations are cheap enough.

From "AI Dividend" to "AI Threat": Software Stocks Face Collective Revaluation

Goldman Sachs points out that over the past week, software stocks have become the "eye of the storm" in the narrative of AI impact, with the software sector plummeting 15% in a week, down 29% from the peak in September 2025. The "AI Risk Exposure Basket" compiled by Goldman Sachs has seen a decline of 12% year-to-date.

The direct catalysts for the shift in market sentiment include the release of Anthropic's Claude collaborative plugin and the launch of Google's Genie 3 model. In the eyes of investors, these developments are no longer just about "increasing productivity," but are beginning to directly threaten software companies' pricing power, moats, and even their existence.

Goldman Sachs clearly states in the report that the current market discussion is not just about profit downgrades, but about "whether the software industry is facing a long-term decline path similar to that of newspapers."

Valuations Seem to "Return to Rationality," but the Market is Betting on Growth Collapse

On the surface, software stock valuations have significantly retreated:

• The forward P/E ratio for the software sector has dropped from about 35 times at the end of 2025 to around 20 times currently, the lowest level since 2014;

• The valuation premium relative to the S&P 500 has also fallen to its lowest level in over a decade.

However, Goldman Sachs emphasizes that the issue is not with the valuations themselves, but with the assumptions behind those valuations that are collapsing.

The report shows that the current profit margins and consensus expected revenue growth rates for the software industry are still at their highest levels in at least 20 years, significantly above the average level of the S&P 500. This means that the valuation cuts being made by the market imply expectations of significant downgrades in future growth and profit margins.

Goldman Sachs finds through horizontal comparisons that:

• In September 2025, when software stocks were still at a P/E of 36 times, the corresponding mid-term revenue growth expectations were 15%–20%;

• Now, with valuations around 20 times, the corresponding growth assumptions have dropped to the range of 5%–10%.

In other words, the market is pricing in a "growth cliff" in advance.

The Warning of the "Newspaper Moment": Valuation is Not the Bottom, Profit Stability is

The most attention-grabbing part of this report is Goldman Sachs' reference to historical cases.

Goldman Sachs recalls that the newspaper industry saw an average stock price decline of 95% from 2002 to 2009, and the true bottom was not reached during macro improvements or when valuations were cheap enough, but after consensus profit downgrades stopped.

A similar situation occurred in the tobacco industry in the late 1990s: even when valuations had been significantly compressed, stock prices continued to be under pressure until the "Master Settlement Agreement" was implemented and regulatory uncertainties were resolved.

Based on these cases, Goldman Sachs' conclusion is quite calm, even somewhat pessimistic:

Even if short-term financial reports show resilience, it is not enough to negate the long-term downside risks brought by AI.

Funds Have Already Voted with Their Feet: Avoiding "AI Risks" and Embracing the "Real Economy"

Against the backdrop of rising uncertainty regarding AI, market preferences are shifting from avoiding "AI risks" to embracing the "real economy."

Goldman Sachs data shows that hedge funds have recently significantly reduced their exposure to the software sector, although they still maintain a net long position overall; meanwhile, large mutual funds began systematically underweighting software stocks as early as mid-last year.

At the same time, funds are clearly flowing into sectors considered to have "lower AI impact," including typical cyclical industries such as industrials, energy, chemicals, transportation, and banking. Goldman Sachs points out that its tracked Value factor and industrial cycle-related portfolios have recently shown significant outperformance.

Despite the overall cautious tone, Goldman Sachs has not turned fully bearish. Its analyst team believes that some sub-sectors still have defensive characteristics:

• Vertical software, due to its deep integration into industry processes and high customer migration costs, is less likely to be directly replaced by AI;

• Information services and business service companies with proprietary data and clear industry barriers may have their AI impact overestimated by the market;

• Some companies that are highly related to software but whose business models are not purely software have recently shown signs of being "wrongfully punished."

But the premise remains clear: only when profit expectations truly stabilize can stock prices potentially bottom out.

If the core narrative of software stocks over the past two years has been that "AI will amplify growth," then this report from Goldman Sachs marks a turning point— the market is beginning to seriously discuss whether AI will erode the commercial value of software itself. The real question is not whether software stocks can rebound, but which software companies can prove that they will not become the next newspaper industry.

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