Software stocks have lost more than 35% since last October.

Most people see that and think: tech correction. AI hype cooling off. Normal rotation.

It's not normal. And it's not just a stock market story.

What's happening in software right now is the first link in a chain that runs through private credit, into the banking system, and straight into the sector that just gained 2.5% this week while 82 of its stocks are quietly falling apart.

That sector is Financials. And the chain is the most important thing in this market that almost nobody is talking about.

Here's how the chain works.

Start with software.

From 2015 to 2025, private equity went on a buying spree. They acquired over 1,900 software companies in deals worth more than $440 billion. The thesis was irresistible.. sticky recurring revenue, high margins, predictable cash flows, massive switching costs. SaaS was the perfect asset to borrow against.

And borrow they did. Outstanding loans to SaaS companies went from $8 billion in 2015 to over $500 billion by the end of 2025. That's 19% of all direct lending in private credit. Software became the single largest sector exposure in the entire private credit market.

Let that sit for a second.

The private credit industry.. the $3 trillion shadow lending system that financed a decade of leveraged buyouts.. built its house on one assumption: software revenue is durable.

Then AI showed up and started eating the foundation.

The software problem isn't a stock market story. It's a credit story.

When AI agents can automate the workflows that enterprise software charges monthly subscriptions for.. the revenue model breaks. Not overnight. But the market priced it in fast.

The SEG SaaS Index, which tracks over 120 publicly traded software companies, dropped 25.7% in Q1 2026. IGV just hit new lows this week.. down 37% from its September peak and still falling. This isn't old news. It's accelerating.

That's the public market. The public market reprices quickly. You see it on a screen. You can sell.

The private market is different. Private credit loans don't trade on an exchange. There's no transparent secondary market. The loans are marked by the managers who issued them. And when the collateral underneath those loans starts losing value.. the marks don't move until they have to.

This is the part that matters.

$500 billion in loans were underwritten against a thesis that AI is now systematically dismantling. The borrowers are software companies with high leverage from their buyouts. The loans are covenant-lite.. meaning the first sign of trouble isn't an early warning. It's a missed payment. By then it's too late.

Fitch put private credit defaults at a record 9.2%. More than double the rate in the broadly syndicated loan market. UBS warned that if AI disruption accelerates, default rates could hit 13%.

And the investors who poured money into these funds are starting to figure that out.

The run has already started.

Cliffwater. BlackRock. Blackstone. Morgan Stanley. Blue Owl. Ares. Apollo.

These aren't small shops. These are the biggest names in private credit. And in the last few months, they've all either gated redemptions, restricted withdrawals, or scrambled to manage a flood of investors trying to get out.

Blackstone's flagship private credit fund (BCRED) saw its largest redemption wave in history.. nearly 8% of fund shares in a single quarter. Cliffwater faced requests exceeding 14% of assets. Blue Owl's stock is down over 60% from its peak.

Here's the problem. These funds sold themselves to retail investors as "semi-liquid." Higher yields than bonds. Quarterly redemptions available. Access to the same products as pension funds.

But the underlying loans are illiquid. Five to seven year maturities. No secondary market. You can't force a sale of the paper just because you want your money back.

So the gates went up. And when the gates go up.. that's when panic accelerates. Because now the people who weren't worried start worrying. The reflexive loop kicks in. Exactly the same mechanism I wrote about two months ago with Visa and Mastercard.

Falling prices create negative sentiment. Negative sentiment generates bearish narratives. Bearish narratives push more people to sell. More selling drives prices lower. The cycle repeats.

Except this time the loop isn't running through stock prices. It's running through the credit system.

Now here's where it gets into our territory.

Jamie Dimon said it a few months ago. "When you see one cockroach, there are probably more."

JPMorgan marked down the value of certain private credit loans. Then they restricted lending to funds that hold them. That's JPMorgan telling the market: we don't trust the collateral.

Regional banks carry between $100 billion and $150 billion of aggregate exposure to private credit. Much of it through lending to the very funds now gating withdrawals and watching their collateral get marked down.

This is the chain.

AI disrupts software. Software was the collateral. The collateral is deteriorating. The funds holding the loans are gating. The banks lending to the funds are pulling back. And the financial sector.. the one that just rallied 2.5% this week.. is rotting from the inside.

7 stocks scoring in leadership territory on the Flow Score. 82 on exit alerts. Negative capital flows of -$143 million. A put/call ratio of 3.22.. elevated.

The price chart says the sector bounced. The Flow Score says the underlying health is terrible. And now you know why.

It's not random. It's not a mystery. The deterioration in Financials isn't about interest rates or a recession scare. It's about the chain running from AI to software to credit to banks. And the Flow Score is picking it up before the price chart reflects it.

What this means for how we position.

I want to be clear about something. I'm not predicting a financial crisis. I'm not saying this is 2008. The private credit market is less than 5% of US GDP. The leverage is lower. The system is different.

But the chain is real. And it doesn't need to be systemic to matter for your portfolio.

If you're long Financials because the chart bounced.. you're ignoring what's happening underneath. 82 exit alerts didn't appear out of nowhere. They're the Flow Score detecting institutional capital leaving the sector quietly while the index holds up on a handful of names.

We don't short the chain. We don't try to time the next headline. We do what we always do.

We avoid the sectors where the internal structure is breaking down. Financials at 7 leaders versus 82 exits is not a sector we want exposure to. The risk-reward is upside down.

We lean into the sectors where the data confirms real strength. Industrials at 39 leaders, +$684 million in flows, 79% of the sector scoring above 50. That's institutional conviction with depth. Not a handful of names dragging an index higher.

And we watch for the turn. When the private credit stress clears.. when the exit count in Financials starts declining.. when new leaders start emerging.. that's when the sector becomes interesting. Not when the price bounces. When the data turns.

The software selloff isn't a tech story. It's a credit story. And the credit story is a Financials story. And the Financials story is visible right now in the Flow Score.. months before it'll show up in the price chart.

Price moves first. The story comes second. But sometimes.. the story helps you understand why the Flow Score is seeing what it's seeing.

Profits Over Prophets,

Hamilton

PS — This week's Flow Map broke down every sector's internal health.. leaders, exits, flows, and positioning. The Financials data I showed you tonight is one piece of it. Blueprint members have the full picture: 68 names in leadership. 358 exit alerts across three tiers. Every sector ranked and scored. The Flow Score saw the software rotation building months ago. It's seeing the Financials deterioration right now. Join here.​