Anthropic's Plug-Ins: A Relief Rally or a Reset of Expectations?

The software sector entered this week in a state of extreme pessimism. The market had already priced in a severe disruption narrative, with the iShares Expanded Tech-Software Sector ETF (IGV) down 24% year-to-date and hitting a 10-month low last week. This wasn't a measured correction; it was a forced sell-off, with a week-long selloff earlier this month wiping out about $1 trillion in market value. The catalyst for that panic was a report from Citrini Research that laid out a stark 2028 scenario of 10.2% unemployment due to AI-driven layoffs, triggering aggressive selling across the board.

In this climate, any incremental news about disruption is met with fresh dread. The setup was one of oversold exhaustion, where the market had already discounted a worst-case labor disruption scenario. As one strategist noted, the sector was "just massively oversold," and "how much is priced in already" had become the central question. The expectation gap was wide: the fundamental earnings reality for many software firms was actually strong, with a high percentage beating estimates, yet the stock prices told a different story of impending doom.

Then came the near-term positive catalyst. On Tuesday, AI lab Anthropic announced new "plug-ins" for partners like LSEG, FactSet, and DocuSign. These tools are designed to integrate with key business workflows in investment banking, wealth management, and HR. The market's immediate reaction was a relief rally, with partner shares climbing and the broader software index jumping. But viewed through the lens of expectations, this was less a fundamental reassessment and more a technical bounce from oversold levels. The rally was sparked by news that the disruption threat might be more targeted and potentially even beneficial for some partners, offering a temporary reprieve from the broader sell-off. The key question now is whether this bounce holds or if it simply resets the stage for the next wave of fear.

The Reality Check: Plug-Ins vs. Disruption

The plug-ins announced by Anthropic are a classic case of incremental opportunity overshadowed by a structural threat. The new tools target specific, non-core tasks-deal reviews, portfolio analysis, and making new-hire materials reflect a brand's tone and policies. For partners like LSEG and DocuSign, this represents a welcome efficiency gain, a way to embed AI into existing workflows. As a senior portfolio manager noted, these are the kinds of products that corporations trying to reduce overhead and costs would welcome. In isolation, it's a positive for those specific business lines.

Yet this incremental benefit is being played against a much larger, more threatening narrative. The market's expectation gap isn't about these new integrations; it's about the displacement of core software functions. The cybersecurity sector's continued decline is the clearest evidence that the disruption fears are not priced out. Despite the plug-in news, cybersecurity stocks dropped for a second day last week, with major names like CrowdStrike and Zscaler falling sharply. The catalyst was Anthropic's own preview of "Claude Code Security," a tool that can scan software code for vulnerabilities. This directly threatens the fundamental business model of cybersecurity vendors, a threat that management at a top firm acknowledged as a real overhang.

The disconnect is stark. On one hand, you have tools that might help a wealth manager review a deal faster. On the other, you have a tool that could render a core security product obsolete. The market's reaction to the plug-ins was a relief rally from oversold levels, but it did nothing to close the expectation gap on displacement. As one portfolio manager put it, while some products are welcomed, the broader question remains: "some opportunities, they won't exist anymore." For now, the plug-ins are a minor positive for partners, but they are a footnote against the looming shadow of AI tools that can do the work of entire software categories.

The Expectation Gap: Relief vs. Reset

The market's reaction to Anthropic's plug-ins is a textbook case of "buy the rumor, sell the news." The partnership announcements were already partially discounted, as the sector had been hammered by fears of AI disruption for months. The relief rally that followed-where partner shares and the broader software index jumped-is a classic bounce from oversold levels, not a fundamental reset. As one strategist noted, the sector was "just massively oversold," and any incremental news was met with a technical rebound. The opening gains were a reflection of the disaster that took place earlier in the week, not a new conviction.

The deeper story is the entrenched expectation of structural disruption. The sector's massive underperformance shows this narrative is deeply priced in. The S&P 500 software & services index has lost 23.5% so far this year, a staggering drop that contrasts sharply with the S&P 500 being basically flat. Over the past five years, the software sector's decline of 23.5% versus the S&P 500's 76% gain illustrates a decade-long story of skepticism. This isn't a temporary blip; it's a persistent re-rating driven by the fear that AI tools will eventually displace core software functions.

Given this setup, upcoming earnings from major players like Salesforce and Workday are unlikely to change sentiment. The sector is operating under a "guilty until proven innocent" mentality. As one portfolio manager put it, "Everyone wants to just hit the sell button and get out." The fundamental reality-where 87% of software companies have beaten profit estimates this earnings season-exists in a stark disconnect with the stock prices. This divergence is what makes software "the new value sector," but it also means any positive earnings news is likely to be shrugged off as insufficient to overcome the long-term disruption overhang. The plug-in news provided a temporary reprieve, but it did nothing to close the expectation gap. The rally was a reset of short-term sentiment, not a reversal of the long-term narrative.

Catalysts and Risks: What to Watch

The plug-in news provided a temporary relief rally, but the real test is what happens next. The market's expectation gap will only close if we see concrete evidence that these tools are being adopted and delivering value. For now, the setup is one of high uncertainty, where the next catalysts could either bridge the gap or widen it further.

First, watch for measurable impact. The partnership announcements are just the start. The key will be whether these plug-ins lead to corporations trying to reduce overhead and costs by actually using them. Look for any early signals from partners like LSEG or DocuSign on whether these tools are being integrated into workflows and generating cost savings or new revenue. Without this proof of concept, the news remains speculative. The market has already priced in a worst-case disruption scenario; it needs to see a tangible counter-narrative of adoption and benefit.

Second, upcoming earnings calls are critical for guidance. Companies like Salesforce and Workday are reporting this week, and their management teams will be under pressure to address the AI threat. The focus should be on their guidance for AI integration and competitive response. As one strategist noted, "These companies are guilty until proven innocent." Management may have little to say that changes the long-term narrative, but any forward-looking comments on how they are adapting or defending their moats will be scrutinized. A vague or defensive tone could reinforce pessimism, while a clear, confident strategy might begin to shift sentiment.

The overarching risk, however, is that the disruption narrative continues to validate the sector's pessimistic baseline. The recent drop in cybersecurity stocks is a stark reminder. When Anthropic previewed "Claude Code Security," a tool that can scan software code for vulnerabilities, it directly threatened the core business of vendors like CrowdStrike. If AI tools keep advancing to displace core software and security functions, the relief rally from partnership news will be fleeting. The market's deep skepticism is a self-fulfilling prophecy; until companies can demonstrate that their products are not just complementary but essential, the expectation gap will persist.