Nasdaq Tumbles 350 Points Amid Software Sector Selloff and AI Disruption Concerns

This analysis is based on the Benzinga report published on February 5, 2026, which documented a significant market decline where the Nasdaq Composite tumbled approximately 350 points amid a sweeping selloff in software stocks [1]. The CNN Money Fear and Greed Index remained firmly in the “Fear” zone, reflecting deteriorating investor sentiment across technology sectors. The decline occurred as over 100 S&P 500 companies, including major technology firms like Amazon and Alphabet, prepared to report quarterly earnings [2].

The market selloff revealed a pronounced rotation away from growth technology stocks, with the Nasdaq Composite declining 1.35% on February 4 and 1.74% on February 3, representing a cumulative decline of approximately 3.1% over the two-day period [0]. In stark contrast, the Dow Jones Industrial Average gained 0.36% on February 4, signaling a significant rotation from growth to value and defensive stocks. The equal-weighted S&P 500 (RSP) achieved new all-time highs during this period, with 436 stocks making new 52-week highs and 112 reaching all-time highs—contrasting sharply with technology leadership weakness [3].

The divergent performance between major indices highlighted the sector-specific nature of the selloff. While the Nasdaq experienced substantial losses, the Dow Jones Industrial Average demonstrated resilience with a 0.12% gain over the two-day period [0]. This divergence represents a classic market rotation scenario where investors shift capital from overvalued growth sectors to more defensive or value-oriented positions.

Sector performance data revealed extreme dislocation across market segments. The technology sector experienced the sharpest decline at 2.00%, while traditionally defensive utilities suffered an even more severe 4.58% drop [0]. This broad-based repricing suggests the market is reassessing risk across multiple dimensions rather than exhibiting pure risk-off sentiment. Meanwhile, Basic Materials gained 1.35%, Financial Services advanced 0.93%, and Energy added 0.89%, indicating defensive rotation into commodity and financial sectors [0].

The software sector experienced what analysts described as an “Anthropic wake-up call” triggered by new AI productivity tools that raised concerns about potential disruption to traditional software business models [4]. The destruction of value was substantial, with approximately $830 billion in market value wiped from software stocks since January 28 [4]. The S&P 500 software and services index declined nearly 13% over six consecutive losing sessions, with the sector now trading 26% below its October 2024 peak [4].

The iShares Expanded Tech-Software ETF (IGV) declined 21% year-to-date, with the majority of losses occurring during the most recent week of selling pressure [5]. Monday.com stock fell 29% year-to-date, though Cantor analysts identified this decline as potentially creating an “attractive setup” for contrarian investors [5]. The selloff reflected genuine investor concern that new AI developments could supplant traditional software applications, leading enterprise spending shifts from traditional software licenses to AI consumption models [6].

A notable market dynamic was the conspicuous absence of dip-buying behavior that has historically rescued technology sector routs. The “dip-buying reflex” that has rescued countless tech selloffs was conspicuously missing, suggesting either a fundamental reassessment of software sector fundamentals or capitulation among momentum traders [4]. According to market analysts, QQQ (Invesco QQQ Trust) experienced its first day of a short-term downtrend, though the GMI-2 indicator stood at just 2/9, suggesting the breadth deterioration may not yet be severe enough to confirm a broader market correction [3].

The T2108 indicator showed 58% of stocks in overbought territory, indicating mixed technical signals with significant internal divergence across the market [3]. The semiconductor sector, measured by SOXX, declined 3.71% over a 14-day period with elevated volatility at 2.36% daily [0]. Despite these weaknesses, positive divergences existed in market breadth, as the equal-weighted S&P 500 hitting new highs alongside the tech selloff suggested underlying market strength in non-tech sectors.

The market decline revealed several significant cross-domain correlations between sentiment indicators, sector performance, and technical signals. The Fear and Greed Index’s position in the “Fear” zone aligned with elevated volatility but had not reached extreme panic levels that historically signal market bottoms [1]. This suggests the current selloff represents a correction within an ongoing bull market rather than the initiation of a sustained bear market phase.

The correlation between AI development announcements and software sector weakness demonstrated the market’s sensitivity to disruption narratives. Anthropic’s introduction of new AI productivity tools triggered a cascade of selling pressure that erased $830 billion from software sector market capitalization within approximately one week [4]. This rapid value destruction reflected investor concerns about enterprise software business models facing potential obsolescence from AI-native alternatives.

The absence of dip-buyers represents a significant shift in market behavior that warrants careful monitoring. Historically, technology sector corrections have attracted buying interest from investors viewing weakness as acquisition opportunities at discounted valuations. The current environment’s lack of such buying pressure suggests either fundamental concerns about sector fundamentals or exhaustion among momentum traders who have previously supported technology stocks [4].

The rotation into value sectors while maintaining strong market breadth indicators (436 new highs) indicates that capital is being reallocated rather than withdrawn entirely from equity markets [3]. This constructive rotation suggests institutional investors are actively repositioning portfolios in response to changing sector outlooks rather than fleeing risk assets entirely. The concurrent strength in Basic Materials, Financial Services, and Energy sectors, combined with Walmart’s achievement of $1 trillion market capitalization, demonstrates continued confidence in specific segments of the economy [2].

The software sector decline had cascading effects across related market segments. The semiconductor industry, as a key input provider for software and AI applications, experienced significant volatility with the SOXX ETF showing elevated daily fluctuations [0]. Cloud computing companies faced particular pressure, with concerns about enterprise spending priorities affecting growth projections across the sector.

The timing of the selloff, occurring immediately before major technology company earnings reports from Alphabet and Amazon, amplified market sensitivity [2]. Investors demonstrated reluctance to maintain positions ahead of potential guidance revisions, creating a self-reinforcing decline as selling pressure built in anticipation of negative surprises. The Federal Reserve’s policy outlook and potential approach changes added another layer of uncertainty to market calculations [7].

The elevated risk profile stems from the combination of technical momentum weakness and fundamental concerns about software sector business models. The six-session losing streak in software stocks represents an extended period of negative pressure that has established a bearish technical pattern [4]. Investors should monitor whether this weakness stabilizes or continues accelerating in the coming sessions.

The significant decline in software valuations has created potential entry points for investors with longer time horizons and higher risk tolerance. Box CEO Aaron Levie’s characterization of the current period as “the most exciting moment we’ve ever had” reflects industry leadership confidence in AI integration opportunities rather than existential threat [5]. Cantor’s positive outlook on Monday.com’s decline as creating an “attractive setup” suggests professional analysts are identifying value in select software names [5].

The equal-weighted S&P 500’s strength during technology weakness indicates underlying economic resilience that may support market stabilization. The 436 stocks making new highs demonstrate broad-based participation in equity markets that reduces dependency on technology sector performance [3]. Historical patterns show software stocks eventually recover from disruption fears, suggesting the current decline may present opportunities for patient investors.

The immediate time sensitivity centers on upcoming earnings reports from Alphabet (reported after market hours on February 4) and Amazon (reported February 5), which will provide crucial forward guidance on technology sector fundamentals [2]. The AI disruption narrative will be tested against actual company performance and management commentary. Oil price movements, influenced by geopolitical factors including Iran tensions, added another layer of market complexity during the selloff period [2].

Federal Reserve policy developments and bond market signals warrant monitoring for indications of changing monetary policy approaches that could affect equity valuations across all sectors [7]. The software sector’s performance over the coming weeks will depend significantly on the interaction between AI adoption rates, enterprise spending patterns, and competitive dynamics within the technology industry.

The Nasdaq’s approximately 350-point decline on February 4-5, 2026, represents a significant rotation from growth technology to value and defensive sectors rather than a broad market crash. The $830 billion in software value destruction since late January reflects genuine investor concern about AI disruption potential, not merely sentiment fluctuation driven by short-term technical factors [4]. The Fear and Greed Index’s position in the “Fear” zone aligns with elevated volatility but has not reached extreme panic levels that historically signal market bottoms [1].

Positive divergences exist in market structure, as the equal-weighted S&P 500 achieving new highs alongside the technology selloff suggests underlying market strength in non-tech sectors [3]. The rotation into Basic Materials, Financial Services, and Energy sectors indicates continued confidence in specific segments of the economy despite technology sector weakness. The absence of dip-buyers represents the most concerning technical development, as this behavior has historically provided support during technology corrections and its absence may prolong the current weakness period [4].

Earnings reports from major technology companies, particularly Alphabet and Amazon, will provide critical tests of the AI disruption thesis and establish forward guidance that influences sector valuations in the coming weeks [2]. The interaction between AI adoption trajectories and traditional software demand patterns will likely determine whether current weakness represents a buying opportunity or the beginning of a more sustained sector decline.