Tech stocks experienced a significant downturn on Thursday, with the software sector officially entering bear market territory following Microsoft’s disappointing earnings report that raised concerns about excessive AI spending without adequate returns. The iShares Expanded Tech-Software Sector ETF plummeted more than 20% from its October high, marking a critical inflection point for AI investment sentiment.
Microsoft shares dropped 10% after the company reported record AI expenditures but delivered slowing cloud growth and soft profit guidance for the upcoming quarter. The tech giant’s struggles contrasted sharply with Meta’s positive reception, where strong advertising revenue overshadowed its own robust capital expenditure guidance. The selloff rippled across the technology sector, with ServiceNow falling 10%, Salesforce down 6%, Oracle declining 2%, and Broadcom slipping 1%.
The broader market impact was substantial, with the S&P 500 dropping more than 1% from the 7,000 mark it briefly topped on Wednesday, while the Nasdaq Composite fell 2%. Joee Mazzola, head trading and derivatives strategist at Charles Schwab, noted that “Microsoft was the black sheep with losses” compared to more upbeat results from Magnificent Seven peers Tesla and Meta.
The core issue centers on capital expenditure concerns and uncertainty over AI monetization timelines. David Morrison, senior market analyst at Trade Nation, suggested Microsoft’s earnings “reinforced fears that a return on AI investment may be slow in coming.” UBS analysts emphasized that Microsoft needs to “prove” its AI investments are sound, noting the company has “elected to increase the allocation of new GPU compute to its 1P efforts, effectively throttling Azure growth” due to confidence in monetizing Copilot.
Despite the selloff, several prominent analysts view the decline as a buying opportunity. Wedbush Securities analysts, led by tech bull Dan Ives, stated: “We believe that any weakness this morning post print represents strong buying opportunities for long-term investors,” adding that “2026 remains the true inflection year of AI growth for Microsoft.” William Blair analysts continue to see Microsoft “expanding its enterprise footprint” with growing opportunities in AI copilots and agents. Mizuho analyst Gregg Moskowitz noted that Microsoft expects capex spending to decline sequentially, maintaining confidence in the company’s “tangible AI adoption and monetization levers.”
Key Quotes
Microsoft (MSFT) was the black sheep with losses
Joee Mazzola, head trading and derivatives strategist at Charles Schwab, made this observation while comparing Microsoft’s poor performance to more positive earnings results from Magnificent Seven peers Tesla and Meta, highlighting how Microsoft stood out negatively among major tech companies.
Microsoft has elected to increase the allocation of new GPU compute to its 1P efforts, effectively throttling Azure growth, because of its confidence in monetizing Copilot
UBS analysts explained Microsoft’s strategic decision to prioritize its own AI products over cloud services growth, noting that “the challenge for the stock is that many investors don’t buy into that trade-off,” revealing the core tension driving the selloff.
We believe that any weakness this morning post print represents strong buying opportunities for long-term investors
Wedbush Securities analysts, led by prominent tech bull Dan Ives, argued the market overreacted to Microsoft’s earnings, maintaining their bullish stance and suggesting 2026 will be “the true inflection year of AI growth for Microsoft.”
We remain ever-confident that MSFT’s revenue growth opportunities over the medium-term and beyond are greater than many realize, and we remain very bullish on its tangible AI adoption and monetization levers
Mizuho analyst Gregg Moskowitz expressed continued confidence in Microsoft despite the selloff, noting that the company expects capital expenditure to decline sequentially, which should address one of investors’ primary concerns about unsustainable AI spending.
Our Take
This selloff marks a pivotal shift in AI investment sentiment from unbridled optimism to demanding accountability. The market is essentially asking: “Show me the money.” Microsoft’s record AI spending without proportional revenue growth exposes a fundamental challenge facing all AI-heavy companies—the gap between infrastructure investment and monetization remains uncomfortably wide.
The analyst divide is particularly telling. Bulls like Dan Ives pointing to 2026 as an inflection year essentially ask investors for two more years of patience, while the market’s 10% haircut suggests that patience is wearing thin. This could be healthy market discipline forcing more realistic AI economics, or it could represent short-term thinking missing a transformative opportunity. The truth likely lies somewhere between—AI will deliver returns, but perhaps more slowly and unevenly than the hype suggested. Companies that can demonstrate clear AI monetization pathways will increasingly separate from those merely spending on AI infrastructure.
Why This Matters
This market reaction represents a critical moment for the AI investment narrative that has driven tech valuations to historic highs. Microsoft’s earnings reveal growing investor skepticism about the massive capital expenditures required for AI infrastructure without clear near-term returns, potentially signaling a broader reassessment of AI economics across the technology sector.
The selloff highlights the tension between long-term AI potential and short-term financial performance. As the second-largest company by market capitalization and a leader in enterprise AI through Azure and Copilot, Microsoft’s struggles send ripples throughout the entire AI ecosystem. The company’s decision to prioritize first-party AI products over Azure growth represents a strategic bet that investors are questioning.
For businesses and investors, this development underscores the importance of demonstrable AI monetization pathways rather than spending alone. The divergence between analyst optimism (viewing 2026 as an inflection year) and market pessimism suggests we’re entering a more mature phase of AI investment where proof of returns will matter more than promises of future potential. This could reshape how companies approach AI capital allocation and communicate their AI strategies to investors.
Related Stories
- Meta Q4 Earnings: Zuckerberg Bets Big on AI with $135B Capex Plan
- CEOs Express Insecurity About AI Strategy and Implementation
- Groq Investor Warns of Data Center Crisis Threatening AI Industry
- Microsoft’s Satya Nadella on OpenAI Partnership: Competition and Collaboration
- Meta and Nvidia Billionaires’ Wealth Soars $152B in AI Boom