US stocks swung lower Tuesday as a fresh wave of anxiety over artificial intelligence’s impact on software businesses hit everything from legal-tech firms to private-market managers, offering a fresh reminder of how quickly AI narratives can move markets.

The Nasdaq Composite fell 1.4% on the day, while the S&P 500 slipped 0.8% and the Dow Jones Industrial Average eased 0.3%, according to reports from Barron’s and the Wall Street Journal. The selling was heaviest in software names, particularly companies exposed to legal services, data, and automation.

The immediate catalyst was Anthropic’s move to roll out new AI-powered legal tools inside its Cowork assistant. The capabilities are designed to help automate document drafting and research, putting direct pressure on incumbents that charge for similar workflows. Shares of Thomson Reuters, Legalzoom.com and London Stock Exchange Group, which all sell legal software or research platforms, each fell more than 10% after the announcement.

Morgan Stanley analyst Toni Kaplan described Anthropic’s launch as a signal that competition is heating up for established information providers. In a note on Thomson Reuters, Kaplan said the expansion of Cowork into legal work is a “sign of intensifying competition, and thus a potential negative for TRI.”

By the afternoon, the contagion had spread well beyond legal tech. Major software and services names including PayPal, Expedia Group, EPAM Systems, Equifax and Intuit also dropped more than 10%. The 138 stocks in a large State Street software and services exchange-traded fund collectively lost nearly $300 billion in market value, the Journal reported.

For some strategists, Tuesday’s move looked less like an isolated air pocket and more like an acceleration of a longer-running rotation. Daniel Skelly, head of market research and strategy for Morgan Stanley’s wealth unit, wrote that the day’s slide was “just the latest episode in a trend that was evident toward the end of last year.” He noted that investors have been selling software on “continued AI-disruption fears” while rotating toward other tech segments, such as memory, and into value, low-volatility and dividend stocks.

Those fears are not limited to public software vendors. Private-funds firms that poured capital into software equity and debt over the past decade were also pulled into the downdraft. Shares of Ares Management and Blue Owl Capital fell more than 9%, while Apollo Global Management and KKR dropped more than 7%. Blackstone, another major software backer, lost more than 5%.

The concern is that a funding model built around “sticky” recurring-revenue software may be less bulletproof if AI tools give customers credible alternatives. Barclays research shows software now accounts for about 20% of investments in business development companies – a slice of the alts market that’s recently come under pressure – roughly double the share in 2016. That concentration has come under greater scrutiny as AI adoption accelerates.

Jon Gray, Blackstone’s president and chief operating officer, framed the issue as a broader technological shift rather than a narrow credit problem. “It’s the change happening in the economy,” Gray said at a Wall Street Journal event. “You could be an incumbent software company that’s the system of record and maybe you face risk from AI disrupters.”

At the same time, big tech platforms are leaning into the same AI capabilities that are spooking investors. Apple said Tuesday it is adding “agentic” AI tools from Anthropic and OpenAI into Xcode, its core development environment for building iPhone apps, according to CNBC. “Xcode and coding agents can now work together to handle complex multi-step tasks on your behalf,” an Apple representative said in a demo, highlighting the ability for agents to build, test and debug projects with minimal human intervention.

The crosscurrents point to several portfolio questions for advisors. First, clients with heavy exposure to software – whether through individual stocks, thematic ETFs, or private-funds positions – may face a more volatile path as markets reassess which business models can withstand AI-driven competition. Second, the same technology pressuring incumbents is also creating winners in areas like computing infrastructure and memory, where some investors are rotating.

Finally, the episode underscores that AI risk is increasingly company specific. Rather than treating “software” as a single trade, RIAs and other advisors may need to step up due diligence on how individual firms are deploying AI, protecting their data moats and defending pricing, as well as how exposed private portfolios are to disruption risk over the next three to five years.