The Catalyst Behind the Recent Market Volatility

In early 2026, markets became volatile after new “agentic” AI tools demonstrated their ability to build software with minimal human input. This innovation fueled concerns that businesses could skip traditional software vendors and let AI create applications directly, a trend referred to as “vibe coding.”

As a result, long-standing software moats, characterized by recurring revenue streams and low churn rates, came under scrutiny. As uncertainty rose, enterprise value-to-revenue multiples fell from 6x to 3x or 4x.

In response, investors rotated capital into industries supporting AI infrastructure, such as materials, energy, and data center hardware. But while industrial assets currently offer more predictable cash flows, these investments ultimately rely on software applications to monetize infrastructure buildouts.

Why Software Moats Remain Resilient

We believe AI is more likely to grow the software market than destroy it. Jevons Paradox suggests that as the cost of delivering software decreases, consumption and demand will increase. Therefore, established software providers are well-positioned to benefit, leveraging large customer bases and proprietary data to train AI models.

Strategies for Identifying Software Winners

Not all software companies will benefit equally. Key things to watch include:

  • Pricing Models: Outcome-or consumption-based pricing models offer resilience compared to seat-based subscriptions, which could face headwinds if AI reduces the number of enterprise knowledge workers
  • Enterprise Adoption Rates: Enterprise integration faces challenges like data security and governance, likely delaying widespread adoption and giving incumbents time to adapt
  • Revenue Acceleration: Companies projecting revenue growth by 2026 are better positioned to turn AI into a financial tailwind rather than a disruptive force

Capitalizing on the Opportunity

The “software apocalypse” narrative overestimates AI's immediate impact while overlooking its long-term integration into enterprise workflows. While initial fears drove valuations lower, disciplined investors can take advantage of this dislocation. Investors who focus on incumbents with robust data assets, scalable pricing models, and clear revenue growth paths can position their portfolios for sustained success in an evolving market.

For more information on related investment opportunities and insights, please listen to our William Blair Thinking podcast, Monthly Macro: AI Anxiety, Software Selloffs, and the Search for Winners, featuring William Blair’s Macro Analyst Richard de Chazal and Co-Head of Technology, Media, and Communications Research Jason Ader.