Software stocks are crashing, now investors are watching these other sectors

Tech stock market rotation 2026: Wall Street’s so-called “Software-mageddon” has gathered speed, wiping out billions in market value and leaving investors questioning whether the tech trade that powered the recent bull market has finally hit a wall.

S&P 500 Software Index Sinks 13% in a Week

In just the first week of February, the S&P 500 software and services index has tumbled 13%, erasing more than $800 billion in market capitalization. Since its peak at the end of October, the index is down about 25%, while the broader S&P 500 has been little changed. Relative to the overall market, software just logged its worst three-month stretch since May 2002, during the fallout from the dot-com bubble, as per a Reuters report.

Big Tech and Software Giants Lead the Selloff

The selling pressure has been driven by sharp declines in heavyweight names including Intuit, ServiceNow and Oracle. Microsoft, one of the “Magnificent Seven,” is the group’s worst performer this year. Other companies hit in the rout include Salesforce, SAP, Adobe, Thomson Reuters, LSEG and RELX.


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AI Fears Add to Earnings Season Anxiety

Investors say the anxiety goes beyond earnings season jitters. Growing concerns about the disruptive power of artificial intelligence are forcing a rethink across the sector. James St. Aubin, chief investment officer at Ocean Park Asset Management, said the selloff reflects “an awakening to the disruptive power of AI,” adding that while the reaction may be excessive, “the threat is real and valuations must account for that,” as quoted by Reuters.

The latest bout of volatility was sparked in part by fears surrounding a new tool from Anthropic’s Claude large language model, compounded by disappointing earnings reports, including from Microsoft. Options traders have shown little appetite for scooping up battered software names, a sign that confidence remains shaky.

Market Rotation: Investors Turn to Consumer Staples, Energy and Industrials

At the same time, investors have been rotating away from technology and into other parts of the market that had lagged during the bull run that began in October 2022. Consumer staples, energy and industrial stocks are drawing renewed attention as investors look for value and quality outside of tech.

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Jim Masturzo, chief investment officer at Research Affiliates, said the case for selling expensive tech stocks should be based on better opportunities elsewhere, not panic. He said, "The right reason to sell these expensive companies is that there are other opportunities in things that are better valued and have more room to run, not because you’re panicking about a crash in software and tech companies,” as quoted by Reuters.

Some portfolio managers are cautiously stepping back into software, seeing potential value after the sharp pullback. Jake Seltz of Allspring Global Investments has been adding modestly to holdings like ServiceNow and Monday.com, though he is waiting for clearer catalysts, such as stronger AI-related revenue or broader enterprise adoption, as per the Reuters report.

Others are testing the waters carefully. Walter Todd of Greenwood Capital said the group looks technically oversold and near a short-term bottom, prompting modest buying of ServiceNow and Microsoft shares, as per the report. Still, he cautioned against overcommitting, saying he does not see a “wholesale replacement” of existing software infrastructure by AI as realistic.

For now, the debate continues. Some investors believe the sector is due for a bounce after such steep losses. Others are not yet convinced that the worst-case AI threats are fully priced in.

As software stocks struggle, the spotlight has shifted. With money flowing into consumer staples, energy and industrials, Wall Street’s rotation suggests that while tech may still play a role, investors are increasingly scanning the rest of the market for steadier ground.

FAQs

Which sectors are gaining attention?

Consumer staples, energy and industrial stocks are seeing renewed interest.

Which companies have been hit the hardest?

Major names like Intuit, ServiceNow, Oracle and Microsoft have seen sharp declines.