Investors Are Dumping AI ‘Loser’ Stocks. Are the Worries Overblown?

Key Takeaways

• New AI advances are triggering swift selloffs in sectors that investors perceive as vulnerable to disruption, and analysts say the volatility will likely continue.
• Analysts think swift price dislocations caused by the selloffs could create opportunities, and that some disruption fears look overblown.
• Top picks in software, legal and information services, and cybersecurity look cheap, while affected names in commercial real estate and freight and logistics look expensive or fairly valued.

The artificial intelligence trade is evolving, and investors are getting nervous, ridding themselves of stocks that once lifted the market. Analysts say some of the fears are overblown, and that certain names have been left behind at discount valuations.

In the stock market, the past month has brought wave after wave of rolling selloffs in a wide swath of industries, from software and legal tech to trucking and logistics to commercial real estate to cybersecurity. Losses have been driven by investor fears that new AI advances will eat into customer bases or even render business models obsolete.

The action “reflects a market that is simultaneously excited about AI’s upside and uncertain about its second-order effects,” explains Lori Keith, who manages the $2.5 billion Parnassus Mid Cap Fund at Parnassus Investments. “Investors are reacting strongly because the market is moving from ‘AI lifts all boats’ to a more differentiated framework of winners, adapters, and businesses models that could see margin compression,” she says.

But across industries, Morningstar analysts say the knee-jerk reactions are short-sighted. In many cases, they do not see credible threats to the firms they cover from AI. On the contrary, in some cases, they expect the technology to help bolster growth. Here’s what investors need to know about the sectors impacted by the “AI scare trade.”

Software

Software stocks have been struggling for the better part of a year, but losses have accelerated in recent weeks. Industry leader ServiceNow NOW has fallen more than 24% over the past month alone and 44% over the past year.

Our analysts say that for the most part, fundamentals in the software industry look solid and AI does not pose a meaningful threat to license sales or seat counts (at least for now). “We see little evidence that the bear case is unfolding—retention rates and other software metrics appear solid,” Morningstar senior equity analyst Dan Romanoff wrote earlier this month. “We acknowledge the risks but believe the fears are overblown.” However, he acknowledges that steep drawdowns across the industry mean “the software landscape is not for the faint of heart.”

Legal Tech

Next to be caught in the storm was the legal and information services industry, where shares tumbled in early February after AI startup Anthropic released a new tool designed to automate some aspects of legal work, like contract reviews and briefings. That sent shares of Thomson Reuters TRI, RELX RELX, and Wolters Kluwer WTKWY sharply lower.

Morningstar analysts say that despite the selloff, these firms have sustainable business models that are not likely to be eliminated by AI. “The plugin has nothing to do with legal research, which is the core value proposition and wide-moat foundation of Thomson and RELX’s legal businesses,” wrote Morningstar senior equity analyst Rob Hales as the stocks were plummeting. “A drawdown of this magnitude implies the market was still pricing in meaningful AI-driven upside in legal, which doesn’t make sense. These stocks have already derated sharply over the past year as this story turned from upside to overhang.” Hales notes that all three names are now significantly undervalued, and he expects AI to encourage rather than suppress their growth.

Financial Advisories

Shares of wealth management firms began to wobble next, with Charles Schwab SCHW, LPL Financial LPLA, and others seeing steep losses after the release of an AI tax planning tool from startup Altruist. The sector-wide selloff reflected investor fears that AI agents and chatbots may render traditional financial advisory models obsolete.

But Morningstar analysts say the worries may be overdone. “We understand the market’s trepidation, given the undeniable potential of AI tools and increasing industry-specific proficiencies, but we view this reaction as particularly shortsighted,” wrote Sean Dunlop, Morningstar director of research, financial services. He says the use of AI-enabled wealth management tools may actually increase the level of service provided to clients, and he notes that many wealth management firms are piloting their own AI initiatives.

Commercial Real Estate

Investors fretted that AI tools could disrupt the agent-heavy, fee-dependent business models that firms like CBRE Group CBRE and Cushman & Wakefield CWK rely on.

Dunlop says these worries may also be overdone. “We view market concerns as overstated due to a combination of fragmented CRE end markets and the noncore nature of real estate activities for many clients,” he wrote. “Overall, risks appear modest for the firms’ profitable brokerage businesses and very limited for outsourcing services (janitorial staff, repairs, back-office, and so on), with the small lease administration revenue pool looking like one of the few activities susceptible to disruption. As we see it, CRE transactions are high-stakes, sporadic, and often bespoke. While AI could change the property discovery process and potentially analyst workflows, both deal structure and advisory should remain differentiated.”

Dunlop says the affected firms still look expensive, trading at 2 or 3 stars. However, he adds that “indiscriminate selling can create opportunities for patient investors.”

Trucking and Logistics

Even companies in this sector weren’t immune. A new tool released by the startup Algorythym Holdings (formerly a karaoke company), designed to help companies increase their freight volumes and reduce empty trucking miles, appeared to spark a double-digit selloff in legacy firms like CH Robinson CHRW, Landstar System LSTR, and Expeditors International of Washington EXPD.

Morningstar senior equity analyst Matthew Young writes that despite the losses, he doesn’t see “outsized AI disruption risk for the large, profitable providers we cover, as the benefits of the network effect are well entrenched.” On the contrary, he says AI tech has enhanced productivity at firms like CH Robinson and helped reduce the cost of freight transactions, boosting margins last year in spite of lackluster demand. Still, CH Robinson remains highly overvalued, as does Expeditors. Landstar is considered fairly valued by our analysts.

Consumer Finance

Consumer finance firms like Capital One COF, Affirm AFRM, and American Express AXP traded lower this week on broader fears—and an alarming AI recession scenario—that the new technology could upend the labor market, trigger mass layoffs, and lead to significantly higher unemployment. The report also laid out a hypothetical future in which firms like American Express see their customer bases shrink rapidly while new advances in AI processes bypass credit card issuers and their fee-based models entirely.

Morningstar equity analyst Michael Miller says that so far, there are few signs of significant disruptions to the job market stemming from AI. “While the labor market has shown signs of weakness, this has mostly been due to low hiring rates, which does not create meaningful headwinds to credit quality,” he wrote on Tuesday. Still, he acknowledges that the risk to the industry is not zero. “Changes in the unemployment rate are the single largest driver of credit losses, and while it is not part of our base case for these firms, a spike in unemployment from AI would increase our net chargeoff projection,” he wrote.

Cybersecurity

Most recently, a new tool released by Anthropic triggered a selloff in the cybersecurity sector, with companies covered by Morningstar falling 5% on average on investor worries that the tool, or others like it, could eliminate the need for external cybersecurity services.

Morningstar equity analyst Malik Ahmed Khan doesn’t expect Anthropic’s tool to pose a meaningful threat to larger vendors like Palo Alto PANW, CrowdStrike CRWD, Fortinet FTNT, and Zscaler ZS. “While [large language models like Anthropic’s Claude] can be trained on security methods and techniques, they simply don’t have access to petabytes of real-time data gathered by large security vendors on a daily basis, and this data matters for training models for security applications,” he writes.

On the other hand, Khan thinks smaller firms like Qualys, Rapid7, and Tenable could face more competitive pressure, since they are already under pressure from larger firms that are poised to benefit from new AI technologies.

Volatility Will Persist, but So Will Opportunities

The swift selloffs are forcing rapid changes in valuations for stocks whose underlying fundamentals and earnings results have remained relatively steady. In some cases, that means deep discounts. “Volatility driven by uncertainty can create dispersion and opportunity for disciplined, long-term investors,” Parnassus’ Keith says.

Analysts say the takeaway for investors is two-pronged. In some cases, skepticism surrounding firms whose business models are actually at risk is warranted. In other cases, the market’s eagerness to derisk may result in some proverbial babies being thrown out with the bathwater—i.e. opportunities to pick up quality companies at a steep discount. In some cases, they even expect AI to enhance the business models for these affected firms, rather than render them redundant.