Wall Street fell in love with artificial intelligence in 2024. Now, in 2025, the honeymoon is decidedly over.

The broader market has held up fine, but software stocks have peeled off in a way that doesn't feel like your garden-variety sector rotation. This looks more like genuine fear, the kind that historically creates opportunities rather than obituaries.

The Valuation Collapse

Here's the math that matters: According to Liz Thomas, Head of Investment Strategy at SoFi Technologies Inc. (SOFI), the software sector's forward 12-month price-to-earnings ratio has imploded from 33.1x to 23.2x. That's a 30% haircut that drags valuations all the way back to 2022 and Covid-era lows.

Translation? The market isn't just cooling off on tech enthusiasm. It's pricing these companies as if growth has evaporated entirely. The weird part: these same companies are pouring more money into AI infrastructure than at any point in history.

When Good Companies Meet Bad Prices

Five household names have tumbled into drawdown territory that looks less like a normal pullback and more like pandemic-level stress:

Salesforce Inc. (CRM) is down 44%, getting hammered on fears that AI agents will cannibalize its sales team model. Meanwhile, its Agentforce platform is growing 330% year-over-year. Go figure.

Oracle Corp (ORCL) has dropped 56% amid hand-wringing about capital expenditures and OpenAI drama. Lost in the panic: a $523 billion backlog of contracted future revenue sitting on its books.

Netflix Inc (NFLX) is down 40%, giving off strong 2022 vibes even though its advertising tier and gaming initiatives have materially strengthened the business model since then.

Adobe Inc (ADBE) has lagged 27%, sitting out the AI rally despite the fact that Firefly is now woven throughout professional creative workflows.

Microsoft Corp (MSFT) is off 26%, apparently being penalized for building data center capacity too aggressively. That's a supply problem, not a demand problem.

Fear Versus Reality

What connects these moves isn't deteriorating fundamentals. It's sentiment. The market is busy extrapolating worst-case scenarios across the entire software sector precisely when these companies are laying the groundwork for the next generation of AI-powered products.

That gap between price and reality tends to create interesting situations for investors with a longer time horizon.

The bottom line: When valuation multiples compress this dramatically and fear gets this loud, the bigger risk often isn't jumping in too early. It's showing up too late when sentiment eventually turns.