A wave of selling tied to artificial intelligence optimism has turned into a more pronounced correction in the heavyweight technology sector, leaving investors cautious as a string of economic data approaches. The decline has been concentrated in software names and other large technology components, denting the S&P 500 and wiping out its gains for 2026.
The market's focus shifted this week to the consequences of AI for corporate business models, with an intensified pullback among software companies. That pressure, coming from a sector that comprises a significant share of major U.S. equity benchmarks, weighed on the broader index and heightened concern about whether the S&P 500 can sustain gains if tech weakness continues.
Under the surface investors have noted a rotation away from the tech-dominated leadership of recent years toward categories that had lagged during much of the bull run that began more than three years ago. Energy, consumer staples and industrials have outperformed thus far in the year, drawing attention as alternatives to the largest technology names.
"Rotation is the dominant theme this year and continues to be as we see these old-economy sectors and stocks really get some love," said Angelo Kourkafas, senior global investment strategist at Edward Jones. He added that high expectations for technology companies have encouraged profit-taking when results do not match elevated investor assumptions.
Since its peak in late October, the technology sector has fallen by more than 12 percent, even as most of the other 11 sectors in the S&P 500 posted gains during that span. Three non-tech sectors achieved double-digit percentage increases, but the overall S&P 500 index still slipped by over 1 percent in the same period. Given that tech still represents roughly one-third of the S&P 500's market-cap weighting, investors fear sustained weakness in the sector could continue to handicap the index.
"A market can absorb a prolonged rotation with large sector winners without obvious index-level stress for quite some time," wrote Jim Reid, head of macro and thematic research at Deutsche Bank, in a note. "However, the longer and deeper the selloff in a dominant sector becomes, the harder it can be for the broader index to withstand the drag."
Stress points are concentrated in software, where the S&P 500 software and services index dropped about 17 percent in a little more than a week. Investor anxiety around potential AI disruption was intensified by disappointing corporate results from prominent technology firms, including Microsoft, amplifying attempts by market participants to distinguish which companies will benefit from AI and which may face more limited upside.
"Before it was, AI lifted all ships," said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. "Now there are concerns that this massive acceleration in the technology space could cause other businesses to not see the kind of growth rate they did before."
Looking ahead, the coming week will bring further earnings from within software, including reports from AppLovin and Datadog. In addition, the tail end of fourth-quarter earnings season will include results from several high-profile non-tech companies such as Coca-Cola, Cisco Systems and McDonald’s.
Economic releases to steer market focus
Beyond corporate reports, a series of delayed economic releases will be issued after their schedules were adjusted in the wake of a recent three-day government shutdown. Monthly data on employment and consumer prices will be focal points for financial markets.
The January nonfarm payrolls report is due on Wednesday and, according to a Reuters poll, is expected to show an increase of 70,000 jobs. Investors will scrutinize that report for signs that a cooling in the labor market has stabilized or is continuing. While the Federal Reserve cited stabilization in the jobs market when it held interest rates steady last month, a separate survey indicated that employer-initiated layoffs announced in January rose sharply.
Inflation remains a concern for policymakers. The Fed has described inflationary pressure as "somewhat elevated," and the January consumer price index, scheduled for release on Friday, will provide fresh data on price trends that could influence monetary policy deliberations.
Markets currently expect the central bank to delay additional interest rate reductions until its June meeting. By that time, the president's nominee for Fed chair, Kevin Warsh, could be in place. After the Fed reduced rates at the end of last year, fed funds futures have continued to price in roughly two additional quarter-percentage-point cuts by December, a path that held in the immediate aftermath of the Warsh nomination.
Kourkafas noted that market participants have kept rate expectations "remarkably stable" in recent weeks, but cautioned that either renewed labor market weakness or a faster-than-expected easing in inflation could prompt investors to bring forward the anticipated timeline for the next rate cut.
Context for investors
For market participants, the interaction between sector-level dynamics driven by AI-related reappraisals and near-term macroeconomic releases will be key. The durability of the software selloff and whether cyclical or defensive sectors can maintain outperformance will influence the S&P 500's trajectory. Simultaneously, employment and inflation readings this week have the potential to alter the perceived schedule for Federal Reserve easing and therefore affect valuations across multiple sectors.