(Feb 5): Wall Street traders kept driving a rotation out of technology giants, whose all-weather earnings made them safe bets at times of economic uncertainty, and into a broader category of companies tuned to improving growth prospects. Bitcoin extended its sell-off.
Stocks pared losses as nuclear talks between the US and Iran appeared on track after an earlier report said they had hit a snag. While the S&P 500 was mildly lower, most of its shares rose. The Nasdaq 100 slid 1.8%. Software firms got hit again, but losses were bigger among chipmakers.
In late hours, Alphabet Inc reported solid revenue, but said it plans to spend far more than investors expected in 2026. Qualcomm Inc gave a tepid outlook. Arm Holdings plc’s forecast fails to satisfy sceptical investors.
“There might be a glass half full and a glass half empty perspective on the moves here,” said Kyle Rodda at Capital.com. “On the one hand, tech stocks are potentially too richly valued. On the other hand, the strength in the market is broadening out in a sign of improving economic fundamentals.”
Traders have stepped up their rotation out of tech and into everything from small caps to value plays in 2026 as they sought companies that will benefit from economic growth. In a further sign of broadening, an equal-weighted version of the S&P 500 — where the likes of Nvidia Corp carry the same heft as Lululemon Athletica Inc — climbed 0.9% on Wednesday.
But it was a brutal day for quantitative strategies tuned to specific characteristics, among them momentum, or the propensity of rising stocks to keep rising. A security tracking the strategy, the iShares MSCI USA Momentum Factor ETF, plunged 3.7%. A Goldman Sachs Group Inc basket that goes long high-beta momentum names and short the opposite tumbled 9.8%.
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The S&P 500 fell 0.5%. The Nasdaq 100 saw its worst two-day rout since October and breached its 100-day moving average. The IShares Expanded Tech-Software Sector ETF slid 1.8%. A gauge of chipmakers sank 4.4%. Advanced Micro Devices Inc sank 17% on a disappointing forecast.
Bitcoin sank 4.6% to US$72,627 ($92,444.37), with prediction traders betting the world’s most-popular cryptocurrency will drop below US$65,000. The yield on 10-year Treasuries advanced one basis point to 4.28%. The dollar added 0.3%.
Oil rose as conflicting reports on the status of nuclear talks between the US and Iran clouded the outlook on whether Washington will proceed with military strikes. Gold remained below US$5,000.
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“Software stocks are being decimated as worries permeate over whether AI will cannibalise their businesses,” said Bret Kenwell at eToro. “However, while the long-term implications are still somewhat unknown, many of these firms continue to generate solid earnings and revenue growth, and analyst expectations for these metrics continue to trend higher.”
Kenwell notes that the software space is quickly approaching “oversold” levels and likely “nearing capitulation.”
“Right now, investors are not asking themselves where the value is,” he said. “Instead, they’re throwing out all software stocks — even as many top firms within this space are doing just fine.”
However, the bigger long-term risk may be on valuation, Kenwell said. Once this sell-off is over and the stocks recover from their oversold condition, the question is: Will there be a new ceiling on just how much investors are willing to pay for them?
“If so, that could limit the upside and the recovery time for this space — high quality or not,” he concluded.
Since reaching an all-time high in October, the S&P 500 software group has plunged over 25%. For those searching for a bottom, Jeffrey Yale Rubin at Birinyi Associates Inc notes that the average bear market in the group is a slide of 32.53%. And the worst drop — 53.94% — occured during the global financial crisis, he said.
“The news for the software stocks gets worse by the day,” said Matt Maley at Miller Tabak. “However, no matter where they are headed over the intermediate and long-term, they are getting poised for a nice bounce. Investors should be careful about negative bets over the short-term.”
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“Of course, we have been saying for some time now that if the tech sector sees a broad decline — with the all the different groups within the sector falling in unison — it’s going to be very tough for the broad stock market to hold up in the face of that kind of scenario,” Maley said.
However, we’re going to have to see more days like that before we can raise a “meaningful yellow warning flag,” he concluded.
“Ultimately, we view this as another AI scare with software and related areas bearing the brunt of it,” said Chris Senyek at Wolfe Research. “Within tech, we’d use weakness to buy AI related semiconductor stocks, and our favorite sector for new money is discretionary. In particular, stocks levered to an uptick in spending as tax refunds hit in February-April.”
It’s not that AI is being abandoned by markets, according to Charu Chanana at Saxo. She says the issue is that it’s being “priced more carefully.”
Brookfield Asset Management plans to hunt for opportunities in software companies after investors pared back their positions in the sector amid fears of artificial intelligence disruption.
“I’d say in our opportunistic business it creates a big opportunity because then when things sell off, often they go way too far and therefore opportunity comes about,” chief executive officer Bruce Flatt told Bloomberg Television. “I suspect somewhere in this cycle of software, there’s going to be some amazing value to be made there.”
“We recommend that investors stay positioned in market-leading, profitable software companies with strong AI innovations. They’re best placed to weather near-term uncertainty and benefit from the eventual rebound,” said Sam Stovall at CFRA.
Worries that advancements in the artificial-intelligence technology will disrupt traditional software business models has sent shares of software and AI-linked names plunging this year. For short sellers betting against the group, that’s meant US$24 billion in paper gains, according to data from S3 Partners LLC.
“It’s been a tough week so far, but let’s keep in mind the broader picture here,” said Mona Mahajan at Edward Jones. “It is hard to get overly bearish when we are still looking at an economy that we think is growing above trend.”
Mahajan also notes she’s looking at an earnings growth picture that is still double digits for 2026, driven by tech sectors but also non-tech sectors
“So a little broadening there,” she said.
Tech is stepping back as cyclical and defensive stocks step up, and while the recent volatility caught attention, the data points to a “technical reset” — not a fundamental break, according to Mark Hackett at Nationwide.
“This is a rotation, not a rupture,” he said. “Seeing that shift near record highs highlights the market’s underlying strength.”
On the economic front, US service providers saw the strongest back-to-back growth since 2024 as business activity picked up even as employment barely expanded. While companies added fewer jobs than expected, recent data has pointed to limited lay-offs.
“The growth impetus in the US looks solid,” said Florian Ielpo at Lombard Odier Asset Management. “The employment index decline is worth monitoring, but it is not yet flashing red - ‘Goldilocks’ it is for now.”
“While we remain positive on the outlook for US equities and expect the S&P 500 to move higher, we believe diversification is key to managing market risks and enhancing long-term returns,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.
To position for a broadening rally, she likes financials, health care, utilities, and consumer discretionary in the US, and see attractive opportunities across Asia and Europe.
Uploaded by Isabelle Francis
