Should We Worry About the Tech Sell-Off?

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The past few weeks have been brutal for tech stocks, especially software companies, which are down 22% year-to-date. I've been watching this closely, and I wanted to share my perspective on what's really happening.

It's a Perfect Storm, Not a Fundamental Breakdown

Fed Hawkishness: Powell's cautious tone on rate cuts and Kevin Warsh's nomination as the next Fed chair have strengthened the dollar, weighing heavily on US tech stocks, particularly those with significant international revenue exposure.

Disappointing Earnings: Microsoft's weak guidance for cloud and productivity software triggered the initial panic. Despite planning to increase AI investments, they forecast slowing growth next quarter. The market didn't like that disconnect.

Then SAP's CFO dropped this bomb: "One of the crucial questions about AI is that it completely transforms how companies develop code. So the question remains: will customers then be able to do everything themselves?"

SAP closed down 16%. The entire software sector followed.

The OpenAI Domino Effect

Here's where it gets interesting: Nvidia announced they likely won't invest up to $100 billion in OpenAI (contrary to what they said in September).

Why does this matter? Oracle has $455 billion in remaining performance obligations, with $300 billion from OpenAI alone. When your biggest customer, who generates only $20 billion in revenue against $1.4 trillion in investment commitments, loses a major funding source, investors get nervous.

New AI Tools Amplify the Panic

Anthropic and OpenAI just launched coding tools that can draft contracts and handle specific office tasks. This fueled the narrative that AI will replace both software companies and knowledge workers entirely.

Analysts piled on:

  • UBS: "Volatility will persist as investors analyze AI's impact on software business models"
  • Morgan Stanley: Highlighted "intensifying competition"
  • Jefferies: Expects "significant impact"

Result? Software companies' average P/E collapsed from 39x to just 21x.

But Semiconductors Are Holding Up

While software cratered, semiconductor companies remained relatively stable. They're actually increasing chip and memory prices, maintaining strong pricing power with their customers.

This tells us something important.


What This Really Is (and Isn't)

This is NOT an "AI trade unwind": Hyperscalers are still increasing capex. The AI infrastructure build-out continues.

This is NOT "risk-off": Bond yields are stable, gold is declining, credit spreads remain tight, and VIX is below 30.

This IS sector rotation: From high-multiple growth stories (software) toward companies with more predictable near-term earnings. Real Estate, Consumer Staples, and Healthcare have all outperformed recently.

And like most rotations without a macro catalyst, the effects are temporary. We're probably close to a bottom, especially with major companies like Salesforce, Palo Alto Networks, and Cisco reporting earnings in the next two weeks.


Why "AI Kills SaaS" is Wrong

Yes, some software companies will face headwinds. Growth might slow, margins might compress. But many are actually accelerating revenue since AI emerged.

Companies like Synopsys, CrowdStrike, and Palantir have built platforms so complex, with such strong customer relationships and contracts, that their moats remain intact.

Even Jensen Huang (Nvidia CEO) called out the flawed narrative: "This idea that the software industry is in decline and will be replaced by AI is the most illogical thing in the world, and time will prove it."

My Take

When markets rotate this aggressively, they tend to overshoot, creating opportunities in quality names that get unfairly punished.

The fundamentals haven't changed. AI infrastructure investment continues. What's changed is sentiment and valuations, and that's often when interesting opportunities appear.

This looks more like a healthy reset than the beginning of something broken.

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