If you needed proof that all tech stocks are not created equal, Thursday delivered a sledgehammer blow to that theory. In what traders are calling the "Great Decoupling," the software sector suffered its worst single-day rout in 10 months, while semiconductor stocks continued their victory lap.
The carnage was headlined by Microsoft (MSFT) and ServiceNow (NOW), both plummeting nearly 10% in a single session. This wasn't a broad market panic—it was a targeted liquidation of the software-as-a-service (SaaS) model. As the dust settles, a clear narrative is emerging: Wall Street loves the companies building the AI brains (chips), but they are terrified of the companies trying to sell the AI software.
The "Show Me the Money" Problem
For the better part of 2024 and 2025, the promise of Artificial Intelligence was a rising tide that lifted all boats. But as we move deeper into 2026, investors are demanding receipts.
The core anxiety driving this sell-off is a fear of AI displacement. The worry isn’t just that software companies are spending too much on AI (though they are); it’s that cheap, or even free, AI agents might render expensive enterprise software subscriptions obsolete.
Jordan Klein, a trading desk analyst at Mizuho Securities, called this shift with chilling accuracy. Before the earnings prints, he joked that the battered software sector "might get even worse." By Thursday, his note to clients was devoid of humor: "It might really get worse."
Klein’s assessment captures the mood on the floor:
"Earnings figures must either be outstanding or forecasts must be quite strong; otherwise, investors expect that concerns about the threat and risks of AI will continue to be a heavy burden on overall sector sentiment."
The "Big Three" stumble
The catalyst for Thursday's bloodbath was a trio of earnings reports that were "good" but not "perfect"—a sin the current market will not forgive.
1. Microsoft (MSFT): The Growth Plateau Microsoft’s report was arguably solid on paper. Its Azure cloud business grew 38% in the December quarter (constant currency). In any normal market, that’s a win. But in this market, investors were looking for acceleration. The growth rate didn't budge from the September quarter, triggering fears that the billions poured into AI data centers aren't yet yielding a growing return. The lack of acceleration suggests that while everyone is building on Azure, the massive revenue explosion from end-users hasn't arrived yet.
2. ServiceNow (NOW): The Forecast Flop ServiceNow has been a darling of the enterprise world, but its latest guidance left investors cold. Even after factoring in revenue from recent acquisitions, the forecast fell short of the whisper numbers.
"Given its significant spending on AI and acquisitions, the outlook appears less robust," Klein noted. The stock’s 10% dive made it one of the worst performers in the S&P 500 for the day, cementing its spot alongside Intuit (INTU) as the two biggest losers of the year so far, both down roughly 25% YTD.
3. SAP (SAP): The Backlog Bomb Adding fuel to the fire, European software giant SAP dropped a bombshell the following day, plummeting 16%. The culprit? A lower-than-expected cloud order backlog. When your future revenue pipeline looks thin, investors don't stick around to ask why.
The Contagion Spreads
The weakness wasn't contained to the giants. The sell-off triggered a sector-wide repricing:
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Figma (FIG): -9%
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Workday (WDAY): -7.6%
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Salesforce (CRM): -6%
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iShares Extended Tech Software ETF (IGV): -4.9% (its worst day since last April)
The message is clear: If Microsoft can't convince the street of its AI roadmap, the smaller players have a steep hill to climb.
The Hardware Hedge: Why Chips Are King
While software executives were sweating, semiconductor investors were popping champagne. The divergence is stark. The logic is simple: In a gold rush, sell shovels. Even if AI software doesn't monetize immediately, the training of those models requires endless amounts of silicon.
Chip stocks remain the best performing sector of the year. The leaderboard is dominated by storage and memory plays, suggesting that the data boom is real, even if the software revenue isn't.
Top Performers YTD (Hardware/Chips):
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Sandisk (SNDK) & Western Digital (WDC): Riding the storage wave.
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Micron (MU): Memory demand is insatiable.
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Lam Research (LRCX) & Applied Materials (AMAT): The equipment makers are printing money.
Investors are effectively rotating capital out of the "application layer" (software) and parking it safely in the "infrastructure layer" (chips).
The Bottom Line
We are entering a new phase of the AI trade—the "Prove It" era. The honeymoon period for "AI integration" announcements is over.
If software companies want to stop the bleeding, they need to demonstrate that AI is a revenue generator, not just a capital expense sinkhole. Until then, the gap between the chipmakers and the code-writers is likely to keep widening. As Klein warned, for software stocks, the path of least resistance right now is down.