A pronounced selloff in U.S. equities last week was interpreted by Barclays strategists as investors "rendering judgment" on which companies will thrive or falter amid the intensifying artificial intelligence arms race, rather than the start of a sustained downturn for risk assets.
In a client note, the analysts including Ajay Rajadhyaksha and Harry Mateer emphasized that the broad economic backdrop "has not worsened," and argued that the near-term market tone will be shaped largely by the evolving prospects of AI - "in good ways and bad." They added: "Well, some of the 'bad' showed up last week."
The rout was particularly acute within the software sector after Anthropic, an AI startup, rolled out a plugin for its latest automated work assistant capable of handling legal and administrative tasks. That release intensified worries that such tools could reduce demand for services currently supplied by certain software companies - a sector that accounts for roughly 8% of the benchmark S&P 500.
The immediate market reaction was sharp. Software-heavy names plunged, and at one point last week the Nasdaq Composite, which is sensitive to technology stocks, fell about 5% over three sessions, erasing trillions of dollars in market value according to Barclays' commentary. By Friday, some of those losses had recovered, helping the S&P 500 bounce and pushing the blue-chip Dow Jones Industrial Average above the 50,000 level for the first time.
The Barclays team said the episode has spawned an "impassioned debate" about the extent to which AI will commoditize software-as-a-service companies. One camp argues that the selloff is overdone, while the opposing view suggests firms can employ AI to perform functions at a small fraction of current costs, potentially undermining existing revenue streams.
"We don’t know which theory will win out, and it’s not clear that anyone does right now," the analysts wrote. "The winners and losers from a revolutionary technology are often not clear for years."
Barclays noted countervailing market signals that argue against a prolonged software slump. Among these, the U.S. economy showed relative resilience and the equal-weighted S&P index rose to a new record high in the same week, suggesting breadth beneath the headline volatility.
Summing up their view, the analysts wrote that although markets "may have turned Saas-y last week," the episode is unlikely to mark the start of a longer-term trend. The near-term direction of sentiment, they said, will hinge on how AI developments play out across industries and on whether companies and customers adapt to new competitive dynamics.
Contextual note: The analysis reflects Barclays' interpretation of last week’s market moves and highlights the interplay between AI-related developments and investor sentiment across technology and broader equity markets.