Reading the Tea Leaves (Ep. 5) – SaaSquake: Tremors in Software
Published on February 17, 2026
In the fifth episode of “Reading the Tea Leaves,” Managing Director of Private Client Chris Zand moderates a brief conversation with Greg Hermanski and Jasmine Shen from our Core Equity team, and Carl Kaufman from our Strategic Income team, that examines the implications of the recent selloff in software stocks.
Transcript
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Chris Zand: Hello, and welcome to this edition of Reading the Tea Leaves. I'm Chris Zand, Managing Director of Private Client at Osterweis Capital Management, and this series focuses on recent developments in the financial markets. In the last couple of weeks, we've seen a rotation out of software stocks, and today we're going to be speaking with several portfolio managers at Osterweis to understand their take on what's happening. Joining me today will be Greg Hermanski, Jasmine Shen, and Carl Kaufman, and we'll be discussing the implications of the selloff, which truly has been significant. So with that, let's get started. Greg, can you give us a quick recap of what's been happening in the software sector? |
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Greg Hermanski: Sure. The selloff in software began in late December and really accelerated over the last couple of weeks. The catalyst has been a wave of new AI product launches, notably Cowork from Anthropic and OpenClaw, an open-sourced personal AI agent. Investors are growing concerned that these AI tools are increasing the pace of innovation and reducing the moat that entrenched software companies enjoy. That fear has triggered what's been a fairly indiscriminate selling across the sector. IGV, the software sector ETF, is now down over 23% year-to-date. |
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Chris Zand: Fascinating. Thanks, Greg. Jasmine, I'd like to turn to you next. What's your take on how the market's responding to these developments? |
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Jasmine Shen: We think some of the concerns are legitimate. The lack of revenue acceleration, even at the most established companies with massive install bases, shows that no one is immune to seat-based disruption risk. When AI can spin up functional software tools in a matter of days, the competitive moats that incumbents relied on for years are getting meaningfully narrower. In addition, even though large software companies have been rolling out their own AI agents and tools, the revenue from those offerings have not ramped as quickly as investors have hoped. These companies face a very difficult transition, giving up profitable, predictable seat-based subscription revenue, and switching to consumption-based or value-based pricing models. The traditional software business model is being challenged in a fundamental way. That said, while valuation derating is warranted in some cases, we do think the market has gotten ahead of itself at this stage. Investors are throwing out the baby with the bathwater. |
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Chris Zand: Thank you, Jasmine. Greg, I'd like to come back to you. Can you talk a bit about how we're responding and adjusting portfolios given these developments? |
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Greg Hermanski: Of course, Chris. We think a selective approach is essential right now. So we've been reducing exposure to companies that we view as most vulnerable to AI disruption, while at the same time maintaining positions in software companies with moats that we believe are both least prone to AI displacement and could eventually emerge as AI beneficiaries on the other side of this. We're actively monitoring the landscape and we're evaluating new AI product launches for their implications on the companies that we follow. Now, frankly, some of these AI-impacted stocks seem to be clearly oversold, but uncertainty is likely to put these stocks in a holding pattern for a period of time. |
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Chris Zand: Thanks, Greg. Very helpful. Let's turn to Carl Kaufman next. Carl covers the fixed income sector. Carl, maybe you could talk for a minute about how these developments are affecting the fixed income markets. |
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Carl Kaufman: Sure. It hasn't had as much of an effect on the high yield market as a whole, but we have seen a few isolated cases where spreads have widened like Oracle, which is an investment grade where people are worried about their massive spending. And a few other high yield names have been tossed in as well as investors tried to lower their weightings to the sector. We have a pretty small software exposure in our portfolios, however, private credit and leveraged loans are much more heavily exposed to software companies, so there's been more weakness there. We could see more material weakness there as prices are reflecting the fall in software stocks, but we'll have to wait and see. There clearly will be winners and losers over time, and eventually it will be more evident in companies' financial results whether these fears were overblown or not. |
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Chris Zand: Thank you, Carl. And that concludes our update on recent developments with software stocks. And thank you all for watching, and I'd like to thank our portfolio managers for providing their perspectives. If you'd like to learn more, please visit us at osterweisprivateclient.com. Thank you. |
Core Equity Composite (as of 12/31/25)
In our Core Equity accounts Osterweis has the discretion to decrease or increase equity exposure in an effort to reduce risk.
| QTD | YTD | 1 YR | 3 YR | 5 YR | 7 YR | 10 YR | 15 YR | 20 YR | INCEP (1/1/1993) |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| Core Equity Composite (gross) | 3.59% | 12.80% | 12.80% | 16.37% | 8.43% | 13.69% | 11.21% | 10.31% | 9.20% | 11.39% | |
| Core Equity Composite (net) | 3.34 | 11.73 | 11.73 | 15.25 | 7.38 | 12.58 | 10.13 | 9.22 | 8.11 | 10.24 | |
| S&P 500 Index | 2.66 | 17.88 | 17.88 | 23.01 | 14.42 | 17.29 | 14.82 | 14.06 | 11.00 | 10.80 | |
Past performance does not guarantee future results.
Rates of return for periods greater than one year are annualized. The information given for these composites is historic and should not be taken as an indication of future performance. Performance returns are presented both before and after the deduction of advisory fees. Account returns are calculated using a time-weighted return method. Account returns reflect the reinvestment of dividends and other income and the deduction of brokerage fees and other commissions, if any, but do not reflect the deduction of certain other expenses such as custodial fees. Monthly composite returns are calculated by weighting account returns by beginning market value. Net returns reflect the deduction of actual advisory fees, which may vary between accounts due to portfolio size, client type, or other factors. From 1/1/2021 onward, net returns also reflect mutual fund fee waivers in certain periods.
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References to specific companies, market sectors, or investment themes herein do not constitute recommendations to buy or sell any particular securities.
There can be no assurance that any specific security, strategy, or product referenced directly or indirectly in this commentary will be profitable in the future or suitable for your financial circumstances. Due to various factors, including changes to market conditions and/or applicable laws, this content may no longer reflect our current advice or opinion. You should not assume any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Osterweis Capital Management.
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Strategic Income Composite (as of 12/31/25)
| QTD | YTD | 1 YR | 3 YR | 5 YR | 7 YR | 10 YR | 15 YR | 20 YR | INCEP (10/1/2002) |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| Strategic Income Composite (gross) | 0.93% | 6.39% | 6.39% | 9.49% | 5.78% | 6.44% | 6.37% | 5.83% | 6.69% | 7.29% | |
| Strategic Income Composite (net) | 0.76 | 5.64 | 5.64 | 8.72 | 5.04 | 5.69 | 5.62 | 5.07 | 5.88 | 6.44 | |
| Bloomberg U.S. Aggregate Bond Index | 1.10 | 7.30 | 7.30 | 4.66 | -0.36 | 1.99 | 2.01 | 2.42 | 3.26 | 3.34 | |
Past performance does not guarantee future results.
Rates of return for periods greater than one year are annualized. The information given for this composite is historic and should not be taken as an indication of future performance. Performance returns are presented both before and after the deduction of advisory fees. Account returns are calculated using a time-weighted return method. Account returns reflect the reinvestment of dividends and other income and the deduction of brokerage fees and other commissions, if any, but do not reflect the deduction of certain other expenses such as custodial fees. Monthly composite returns are calculated by weighting account returns by beginning market value. Net returns reflect the deduction of actual advisory fees. Net return calculation:
- Prior to 1/1/2020, the composite net return is calculated using actual advisory fees with the following exception: one member of the composite was a mutual fund portfolio whose fee was partially waived at some point due to an expense limitation agreement. The composite net return shown during this period does not reflect this waiver and is therefore lower than the actual return.
- From 1/1/2020 onward, the composite net return is calculated using actual advisory fees.
- Our fees may vary between accounts due to portfolio size, client type, or other factors.
The Bloomberg U.S. Aggregate Bond Index (Agg) is widely regarded as the standard for measuring U.S. investment grade bond market performance. This index does not incur expenses and is not available for investment. The index includes reinvestment of dividends and/or interest income.
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The fee schedule is as follows: 0.75% per annum (minimum account size $250 million). A discounted, institutional rate is available.
Clients invested in fixed income separately managed accounts are subject to various risks including potential loss of principal, general market risk, default risk, interest rate risk, inflation risk, liquidity risk and small and medium-sized company risk. For a complete discussion of the risks involved, please see our Form ADV Brochure and refer to Item 8.
The Fixed Income Composite includes all fee-paying separately managed accounts and mutual funds that are predominantly invested in fixed income securities of various maturities and qualities, as well as income-generating equities. Individual account performance will vary from the composite performance due to differences in individual holdings, cash flows, etc.
References to specific companies, market sectors, or investment themes herein do not constitute recommendations to buy or sell any particular securities.
There can be no assurance that any specific security, strategy, or product referenced directly or indirectly in this commentary will be profitable in the future or suitable for your financial circumstances. Due to various factors, including changes to market conditions and/or applicable laws, this content may no longer reflect our current advice or opinion. You should not assume any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Osterweis Capital Management.
Holdings and sector allocations may change at any time due to ongoing portfolio management. You can view complete holdings for a representative account for the Osterweis Strategic Income strategy as of the most recent quarter end here.
This commentary contains the current opinions of the authors as of the date above, which are subject to change at any time, are not guaranteed, and should not be considered investment advice. This commentary has been distributed for informational purposes only and is not a recommendation or offer of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
As of 12/31/2025, Osterweis portfolios did not hold Anthropic, OpenClaw, Oracle, or IGV.