Published February 6, 2026
The largest companies in the stock market issued earnings reports this week. Some member of the Magnificent 7 components saw investors heading for the exits after seemingly strong earnings and revenue gains. What gives? The notion that AI will render many functions currently performed by big software packages almost obsolete continued to pound software company valuations. With software debt a notable portion of the private credit market, managers of those funds also came under pressure.
Delta Research provides the following summary of the tech-related selloff:
“Technology stock valuations pulled back sharply this week. The SPDR S&P Software and Services ETF (XSW) is down 12%. The average software stock is down ~30% from its highs.
Right behind the software sell-off is the pullback in semiconductors. The VanEck Semiconductor ETF (SMH) is down ~8% this week. JPMorgan reports that the Wednesday sell-off in momentum stocks (their proprietary index) on Wednesday was the second largest one-day move in 20 years, a 4 standard deviation move.
Despite weakness in technology (including many of the largest market-cap names in the S&P 500), the majority of stocks traded higher on Tuesday and Wednesday. The equal-weighted S&P 500 was up 1.1% in the first half of the week and touched a record high.
At a macro-level, the rapid pullback in technology stocks (especially software) is related to the potential ripple effects of artificial intelligence (AI). The defensibility of many software business models is being questioned with AI emerging as a powerful, low-cost way to write software. Uncertainty about the return on investment and the durability AI spending has also pressured the semiconductor sector.
For example, Advanced Micro Devices (AMD) beat EPS expectations by the widest margin in over three years and revenues increased 34% year-over-year to a record level. Yet the stock traded down -17% on this news. After years of investor focus on identifying stocks with the greatest AI exposure, concerns about AI disruption have pushed investors back toward “real economy” industries, including those leveraged to recent signs of accelerating economic growth.
Overall, earnings season is going well. FactSet sees a blended (combination of actual plus forecasted) net profit margin of 13.2% for the fourth quarter, which would be the highest level since FactSet began tracking this metric in 2009. So far, S&P 500 earnings are up 11% versus expectations of 7%.
With earnings rising and valuations falling in parts of technology, the overall market P/E is declining. Valuations are becoming more attractive as fundamentals strengthen. The forward P/E multiple for software has declined from ~35x in late 2025 to ~20x today, representing the lowest absolute level since 2014 and the smallest premium to the average S&P 500 stock since 2010. At the same time, profit margins and consensus revenue growth estimates are at their highest levels in at least 20 years of data history, and roughly 2x the comparable fundamentals for the average S&P 500 stock.
Macro Data Supportive
The January ISM Manufacturing Index came in at 52.6% (consensus 48.3%), up from 47.9% in December, marking the first month of expansion in the past year. The new orders index reached its highest level since February 2022. The ISM Services PMI was 53.8% in January, showing steady expansion. Separately, existing home sales have edged up to a three-year high.
The primary criticism of the stock market over the past couple of years has been elevated valuation relative to long-term averages. The rotation out of technology as earnings rise and into other areas of the market provides a rapid solution to the high valuation critique. Given continued economic expansion and modest interest rate easing by the Federal Reserve, it would be unusual to see a significant equity setback (i.e., a bear market) without a recession, even starting from elevated valuations.
Market Update
Stocks popped higher to begin the trading week with the S&P 500 gaining +0.5%. The ISM’s manufacturing survey reported its best level in a year to support the rise in stocks. Gains among Walmart and Caterpillar joined huge strength in disk drive makers (beneficiaries of data center buildouts) to also power the rise in the indexes. Weakness in tech stocks, particularly in the software sector, sent the Nasdaq down -1.4% Tuesday. But technology’s weakness did not bleed over into other sectors as the leading industrial sector closed higher as did the equal-weighted index of stocks. The Nasdaq fell another -1.5% Wednesday. Earnings from semiconductor maker, Advanced Micro Devices, beat expectations in their report overnight. But the stock got hammered (-17%) as investors continue to shift their thinking around AI. AI chatbot maker Anthropic released add-on tools that are viewed as potentially replacing numerous corporate tasks, particular in heavy administrative areas like finance and legal. This news accelerated selling in software stocks this week. Elsewhere Wednesday, pharmaceutical company Lilly posted strong earnings to keep the healthcare sector as a safe haven counterweight to lagging technology. Thursday brought a 3rd straight day of heavy declines for the Nasdaq. This time the culprit was the overnight earnings report from Alphabet(Google). The company posted sharp gains in sales and profits. But the announcement of a doubling in its already enormous capital investment in AI left the stock lower on the day. That news, plus a weak report on the labor market, sent the Nasdaq down -1.6% again, this time taking the other indexes with it. An overnight report from Amazon kept the AI capex spending concerns front and center Friday sending Amazon shares down -10% at the open. But it was a rebound day on Wall Street Friday with buyers swooping in to scoop up heavily beaten-down sectors. By day’s end, Amazon had cut its loss in half while the market’s leaders soared with small and mid-cap indexes blasting upward by over +3%.
A volatile week for stocks with the VIX volatility index jumping above 20 for the first time since November. The Nasdaq suffered a notable pullback this week with the Mag 7 stocks continuing to experience heavy selling (down -4.5% this week). That left the Nasdaq 100 (QQQ) down -1.97% for the week. However, other sectors are benefitting from the rotation out of tech. Strength outside of tech left the S&P 500 (SPY) essentially unchanged at -0.20% this week. Gains in housing, regional banks, and energy pushed up the small cap index (IWM) by +2.07% to recoup the prior week’s loss.
Warm wishes and until next week.