How pessimistic is Wall Street? Goldman Sachs directly compares "software" to "newspapers"

Author: Zhao Ying

Goldman Sachs compares the current software industry to the newspaper industry disrupted by the internet in the early 2000s, and the tobacco industry faced with heavy regulation in the late 1990s. Goldman believes that the recent 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 true. Only when earnings expectations truly stabilize can stock prices potentially bottom out.

When Wall Street starts describing software stocks as the “new newspaper industry,” the market’s fear of AI disruption has already reached an extreme stage.

In its latest report, Goldman Sachs analyst Ben Snider and his team unusually compare the current software industry to the internet-disrupted newspaper industry of the early 2000s and the heavily regulated tobacco industry of the late 1990s. This analogy alone is enough to illustrate how Wall Street is pricing in the “AI impact on software business models.”

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

Goldman Sachs warns that when the industry is perceived by the market to face disruptive risks, the bottom of stock prices depends on whether earnings expectations are stable, not whether valuations are cheap enough.

From “AI Dividend” to “AI Threat”: Software Stocks Undergoing Collective Revaluation

Goldman points out that over the past week, software stocks have become the “storm center” of the AI disruption narrative, with the software sector plunging 15% in a week, a total retreat of 29% from the September 2025 high, and the Goldman-created “AI Risk Exposure Basket” (GS AI at Risk) has fallen 12% since the beginning of the year.

The direct catalysts triggering market sentiment shifts include Anthropic’s release of the Claude collaboration plugin and Google’s Genie 3 model launch. From investors’ perspective, these developments are no longer just about “productivity gains,” but are beginning to directly threaten the pricing power, moat, and even the existence of software companies.

Goldman explicitly states in the report that the current market discussion is no longer just about profit downgrades, but about “whether the software industry is facing a long-term decline similar to that of newspapers.”

Valuations Seem “Rationalizing,” but the Market Is Betting on Growth Collapse

On the surface, software stock valuations have significantly retreated:

• The forward P/E ratio of the software sector has fallen from about 35x at the end of 2025 to around 20x now, the lowest since 2014;

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

However, Goldman emphasizes that the issue is not the valuation itself, but the assumptions behind it are collapsing.

The report shows that the current profit margins and consensus revenue growth expectations in the software industry remain at their highest levels in at least 20 years, significantly above the average for the S&P 500. This implies that the market’s valuation decline implicitly assumes a substantial downward revision of future growth and profit margins.

Through horizontal comparison, Goldman finds:

• In September 2025, when software stocks still traded at a 36x P/E, the corresponding mid-term revenue growth expectation was 15%–20%;

• Now, with a valuation around 20x, the growth assumptions have been lowered to 5%–10%.

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

The “Newspaper Moment” Warning: Valuations Are Not the Bottom; Profit Stability Is Key

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

Goldman reviews that the newspaper industry’s stock prices fell an average of 95% from 2002 to 2009, and the bottom was not reached when macro conditions improved or valuations became cheap, but only after consensus earnings stopped downward revisions.

A similar situation occurred in the late 1990s tobacco industry: before the Master Settlement Agreement was implemented and regulatory uncertainties were resolved, even with sharply compressed valuations, stock prices continued to be under pressure.

Based on these cases, Goldman’s conclusion is quite calm and even somewhat pessimistic:

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

Capital Has Spoken: Stay Away from “AI Risks,” Embrace “Real Economy”

Against the rising uncertainty of AI, market preferences are shifting from avoiding “AI risks” to embracing the “real economy.”

Goldman data shows that hedge funds have recently sharply reduced their exposure to the software sector, although they remain net long overall; large mutual funds, on the other hand, began systematically underweighting software stocks as early as mid-2023.

Meanwhile, capital is clearly flowing into sectors considered “less impacted by AI,” including industrials, energy, chemicals, transportation, and banking—typical cyclical industries. Goldman notes that its tracked Value factors and industrial cycle-related portfolios have recently outperformed significantly.

Despite the overall cautious tone, Goldman does not turn completely bearish. Its analysts believe some sub-sectors still have defensive qualities:

• Vertical software, deeply embedded in industry processes and with high customer switching costs, is less likely to be directly replaced by AI;

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

• Some companies highly related to software but with non-software business models have recently shown signs of being “mispriced.”

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

If the past two years’ core narrative for software stocks was “AI will amplify growth,” then Goldman’s report marks a turning point—markets are beginning to seriously discuss whether AI will erode the very business value of software. The real question is not whether software stocks can rebound, but which software companies can prove they won’t become the next newspaper industry.