Software stocks face an existential crisis as AI advances from Google and Anthropic batter once-untouchable companies. Wall Street bulls appear disconnected from reality, with forward earnings estimates trending higher despite evidence AI will crush future profits for firms like Salesforce and Workday.

Software stocks have plunged 24% over the past three months, yet two-year forward earnings estimates have actually risen by 5%. This disconnect between market prices and analyst projections suggests Wall Street hasn't fully priced in the AI disruption, according to Goldman Sachs strategist Ben Snider.

The sector's PE multiple has collapsed from 35 times to below 20 times, signaling what Innovator Capital's Tim Urbanowicz calls "the dark side of AI." This compression indicates investors are anticipating profit erosion that analysts have yet to reflect in their models.

The divergence between stock prices and earnings forecasts creates a dangerous disconnect. Until Wall Street cuts estimates to more realistic levels reflecting AI's disruptive potential, software stocks remain overvalued and vulnerable to further downside.