ServiceNow’s woes are dragging the entire software sector down

Investors have not had a lot of time for software stocks in 2026. Every few weeks, an Anthropic-shaped grenade is lobbed toward the likes of Workday, Salesforce, Atlassian, ServiceNow, Adobe, or Figma.

Whether you make dashboards, CRMs, design tools, or run an HR platform, if it’s built on code, the market thinks there’s a decent chance that at least one of the four C’s — Claude, Codex, Copilot, or Cursor — is going to blow a hole in your business model. Or, to be more accurate: someone using one of those coding tools will.

There was a brief reprieve when the world was hurtling toward energy disaster, with investors suddenly seeing their non-energy-exposed cash flows as useful once again. However, with the geopolitical situation seemingly no longer a major threat — at least from a markets perspective, that is, as the S&P broaches new highs on an almost daily basis — the focus is back on software.

So, it was a big test for the space then when ServiceNow stepped up to the plate yesterday, with its Q1 numbers set to be heavily scrutinized for any signs of AI-related weakness.

In a normal quarter, revenue that came in $20 million ahead and adjusted EPS that came in on the number might be broadly shrugged off, but ServiceNow is being aggressively dumped in the premarket, down 13% at the time of writing. And misery loves company in the 2026 software world, which is why peers like Workday, Atlassian, HubSpot, Salesforce, and Intuit are among the worst performers in the early action on Thursday.

Given the price action of the last few months, that’s hardly surprising. Increasingly, the fate of many of these high-profile software names on any given day is mostly tied to what the IGV software ETF is doing. The average correlation between NOW, TEAM, WDAY, CRM, ADBE, FIG, and IGV is now north of 0.8.

So, what exactly was ServiceNow’s great transgression? The main culprit was a miss on margins, with the company reporting adjusted gross profit margins of 79.5%, about 1 percentage point light vs. what Wall Street was expecting. The company also said it was cutting its full-year subscription adjusted gross margin; previously, the company expected 82%, now it sees just 81.5% (25 bps of which was attributed to an acquisition). That half a point cut was seemingly all the market needed to re-evaluate things on a more structural basis, with investors ignoring the fact that the company now expects $1.5 billion in AI software sales in 2026, up from $1 billion previously.