The Great Tech Unwind: How Software's AI Crisis Is Reshaping Sector Leadership at Midday

The Tech Reckoning Intensifies

The S&P 500 is up about 0.17%, or by 11.75 points, while the Nasdaq slips 0.24%, or by 62 points, with the Dow up 0.26%, or by 140 points. But beneath these modest headline moves lies a brutal reality: software firms were caught in another wave of selling as investors worried about risks from better artificial-intelligence tools.

The divergence is stark. Technology is down 2.13% on the day while Healthcare is up 4.20%, Basic Materials up 3.84%, and Energy up 1.84%. This isn't a mild rotation—it's a structural reassessment of which sectors can survive the AI tsunami.

The Semiconductor Stumble

Advanced Micro Devices is down 10%, or by $25 a share, after its first quarter guidance fell short of expectations. Despite strong fundamentals—AMD posted revenue of $10.27 billion in Q4, above estimates of $9.67 billion, with Data Center revenue up 39% year-over-year to $5.4 billion, beating the $4.97 billion analyst expectation—the market punished the chipmaker for providing first-quarter guidance of $9.5-$10.1 billion, with midpoint of $9.8 billion, which is above the $9.39 billion estimate. Even beats aren't enough anymore.

The Software Apocalypse Spreads

Publicly traded software stocks have been slammed this year as investors grew increasingly concerned about AI eating into their future growth and profit margins as companies use programs like Anthropic's Claude Code to build their own software, with the iShares Software ETF down 20% this year. The fear has metastasized beyond pure software into private credit—shares of stocks with significant private credit market holdings were diving on fears about exposure to industries being disrupted by artificial intelligence, with Blue Owl, TPG, Ares Management and KKR all down by double digit percentages.

Bright Spots in Healthcare and Materials

Eli Lilly rose nearly 7% after posting higher-than-expected results, issuing full year guidance for non-GAAP earnings of between $33.50 and $35 per share, topping the $33.04 consensus estimate, and forecasting revenue of $80-$83 billion versus analyst expectations of $77.64 billion. Healthcare's strength reflects a flight to quality and defensive earnings.

The Analyst Scorecard

Analysts at William Blair reiterated an outperform rating on Amazon, noting that the e-commerce giant is well-positioned, believing 2026 sets up favorably for it. Yet even mega-cap endorsements aren't stopping the selling. Bank of America upgraded Five Below to a buy rating, noting the company will return to a higher P/E multiple as results continue to improve under new leadership.

The Bottom Line

Midday trading reveals a market in transition. Wall Street traders kept driving a rotation out of tech companies, whose all-weather earnings made them safe bets at times of economic uncertainty, and into a broader category of firms tuned to improving growth prospects. For investors, the question isn't whether AI will disrupt software—it's whether the selling has finally priced in that reality.