Tech Sector Correction: Nasdaq Suffers Worst Week Since November 2025 Amid AI Disruption Fears and Software Selloff

This analysis is based on the MarketWatch report published on February 6, 2026, which documented a significant tech sector correction that unfolded throughout the week despite a notable Friday rebound [1]. The Nasdaq Composite was on pace for its worst weekly performance since November 2025, reflecting the severity of the selloff that swept through technology stocks. The Dow Jones Industrial Average recorded its worst week since October-November 2008, while the S&P 500 experienced its sixth loss in seven sessions [0][2].

The market rout was characterized by what analysts termed “software-mageddon,” a dramatic selloff concentrated in software and SaaS (Software as a Service) companies. The S&P 1500 Software Index declined 29.9% from its recent peak, representing one of the sharpest sector-specific corrections in recent memory [2][3]. This decline erased approximately $1 trillion in market value since January 28, 2026, demonstrating the magnitude of investor repositioning away from traditional software business models.

Friday’s trading session (February 6, 2026) witnessed a meaningful rebound across major indices. The S&P 500 closed at 6,913.35, representing a 1.42% daily gain, while the Nasdaq Composite finished at 22,985.88, up 1.59% on the day. The Dow Jones Industrial Average demonstrated the strongest recovery, closing at 49,946.47 with a 1.86% increase, and the Russell 2000 small-cap index rose 1.95% to close at 2,662.13 [0]. Trading volume remained elevated throughout the week, with Nasdaq volume consistently exceeding 8-10 billion shares during selloff days, confirming strong institutional participation in both the decline and subsequent recovery.

The Fear & Greed Index stood at 43, indicating sentiment firmly in “fear” territory [0]. This reading reflected the broader risk-asset repositioning occurring across markets, with investors simultaneously reducing exposure to growth and technology positions while rotating toward defensive sectors. The simultaneous selloff in other risk assets, including Bitcoin dropping to its lowest level since October 2024, reinforced the narrative of a comprehensive risk-off environment [3].

The primary catalyst for this week’s tech rout stemmed from evolving investor sentiment regarding artificial intelligence’s impact on established software business models. Growing concerns emerged that generative AI tools, including platforms like Anthropic’s Claude, could potentially displace revenue streams currently generated by traditional software applications [2][3]. Investors expressed uncertainty about whether industry-specific software tools and SaaS platforms could maintain their pricing power and customer retention in an environment where AI-powered alternatives might offer comparable functionality at lower cost.

Nick Dempsey, Director of Media Equity Research at Barclays, characterized the market’s reaction as potentially overblown, stating that the notion of AI companies supplanting industry-specific software tools “just does not seem realistic” [3]. However, the speed and severity of the selloff demonstrated that many investors were unwilling to wait for resolution of these fundamental business model concerns before adjusting positions.

A secondary driver of market weakness centered on Big Tech’s AI capital expenditure commitments. Amazon’s announcement of a $200 billion AI infrastructure spending plan for 2026 shocked investors, who had expected spending closer to $144.67 billion [3]. The sheer scale of planned infrastructure investments by Microsoft, Amazon, and Alphabet raised questions about return-on-investment timelines and the sustainability of the current AI spending boom. Steve Sosnick of Interactive Brokers noted that “crowded trades are hard to exit” and that “premium valuations [are] prone to messy sell-offs” in such environments [3].

Individual stock movements illustrated the divergence within the technology sector during this period. NVIDIA (NVDA) demonstrated notable resilience, rebounding 7.29% on Friday to reach $184.41 per share, recovering from a mid-week decline of approximately 17% [0]. This rebound contributed to broader chip sector rally and suggested that certain AI-related businesses continued to command investor confidence despite broader sector weakness.

In contrast, Amazon (AMZN) experienced a 9% weekly decline following its announcement of the $200 billion AI capital expenditure plan [2]. The market’s negative reaction to this commitment reflected investor concern about near-term profitability implications and uncertainty regarding when these massive investments would generate commensurate revenue returns. AMD experienced its worst single-day decline since 2017, dropping 17% on Wednesday, while Palantir (PLTR) declined 36% from its record highs, unwinding extraordinary gains of 340% in 2024 and 135% in 2025 [2][3].

The software sector experienced broad-based declines across multiple industry verticals. Thomson Reuters (TRI) fell 5.6% along with a record plunge, reflecting AI disruption concerns extending to legal software markets. ServiceNow (NOW) declined 7.6%, Salesforce (CRM) fell 4.7%, and RELX dropped 16.5% for the week as AI fears spread across analytics and information services businesses [2].

The tech selloff triggered a significant sector rotation toward value-oriented and defensive segments of the market. On Friday, real estate emerged as the strongest performer with a 2.14% gain, followed by utilities at 1.95%, technology at 1.34%, and healthcare at 1.29% [0]. The laggards included basic materials, which declined 1.39%, energy falling 0.56%, and communication services dropping 0.51%.

Andrew Wells of SanJac Alpha characterized the rotation from technology to value sectors as “a general trend” reflecting changing market leadership dynamics [2]. Angelo Kourkafas of Edward Jones observed that power was shifting toward “old economy” sectors as investors sought more defensive positioning amid technology uncertainty [2].

Hedge fund behavior contributed to the rotation dynamics. Data indicated reduced hedge fund exposure to software positions, though the sector remained net long on aggregate [2]. Rising short interest in mid-to-large cap software firms suggested that certain market participants were actively positioning for continued weakness in the sector.

Analysts drew explicit comparisons between the current tech selloff and the dot-com bubble era, though most emphasized important structural differences. Deutsche Bank commentary noted that “rotation out of software has echoes of the dot-com crash over 25 years ago” [3]. Nick Giorgi of Alpine Macro characterized the current phase as a “watershed moment” with the software index trading 21% below its 200-day moving average—the deepest breach since June 2022 [2].

However, veteran Wall Street strategists cautioned against excessive pessimism based on historical parallels. As one strategist quoted in market coverage noted, “We doubt [a dot-com style crash] because this time, the industry has many more profitable companies benefiting from the enormous capital spending on AI infrastructure by hyperscalers” [4]. This distinction was considered critical: today’s technology companies have substantially better profitability profiles, established cloud and enterprise software business models, and demonstrable practical applications for their AI investments.

Jim Reid of Deutsche Bank observed a fundamental shift in market dynamics from an environment where “every tech stock is a winner” to a more selective landscape characterized as “brutal winners-vs-losers” [2]. This transition suggested that future market leadership would likely be determined by demonstrable revenue growth and profitability rather than broad AI enthusiasm.

Analyst opinions regarding the correction’s duration and implications varied considerably. Tom Essaye of the Sevens Report suggested that if AI adoption proves “more resilient than expected… then there are opportunities [for buying] developing” [3]. This view implied that the selloff might create attractive entry points for investors confident in the fundamental AI thesis.

Seana Smith of Global X ETFs offered a more nuanced perspective, stating that “markets reward AI investment only with clear, durable revenue growth” [3]. This framework suggested that software companies would need to demonstrate concrete monetization of AI capabilities to regain investor confidence, rather than relying on general AI enthusiasm.

Ben Snider of Goldman Sachs highlighted the importance of near-term earnings reports in determining market direction, emphasizing that upcoming quarterly results would be critical in justifying current valuations or potentially extending the correction [2]. Dave Harrison Smith of Bailard cautioned against expecting a quick rebound, noting a “sell-everything mindset” that suggested the correction could have further room to run before stabilization [2].

Several risk factors warrant ongoing monitoring following this market correction. The depth of the software index’s breach below its 200-day moving average suggests potential for extended technical weakness, as such breaches historically correlate with periods of consolidation [2]. Continued AI disruption sentiment could drive further multiple compression for software stocks, particularly if management guidance during upcoming earnings calls fails to provide clarity on AI integration strategies.

Medium-term catalysts that could stabilize the market include evidence of sustainable AI-driven revenue growth, demonstration that Big Tech AI capital expenditures are generating positive returns, and successful adaptation of traditional software business models to incorporate AI capabilities [2]. The Federal Reserve’s interest rate trajectory remains relevant for growth stock valuations, though inflation data and economic indicators suggest a relatively stable rate environment.

The transition from indiscriminate AI enthusiasm to a more selective “winners vs. losers” dynamic suggests that future market leadership will likely be concentrated among companies demonstrating clear revenue growth and profitability. Investors should carefully evaluate individual company fundamentals, particularly regarding AI monetization strategies and competitive positioning, rather than making sector-wide allocation decisions.

• Nasdaq Composite weekly decline: approximately 8% (worst since November 2025)
• S&P 1500 Software Index decline from peak: 29.9%
• Market value lost since January 28: approximately $1 trillion
• Friday rebound: Nasdaq +1.59%, S&P 500 +1.42%, Dow +1.86%
• Fear & Greed Index: 43 (fear territory)

• NVIDIA: +7.29% Friday recovery ($184.41)
• Amazon: -9% weekly (AI capex concerns)
• AMD: -17% single day (worst since 2017)
• Palantir: -36% from record highs

• AI disruption fears for traditional software business models
• Big Tech AI capital expenditure skepticism ($200B Amazon plan)
• High valuations and crowded trades
• Risk-asset rotation toward defensive sectors

• Current environment differs from dot-com era (more profitable companies)
• Recovery dependent on AI revenue monetization evidence
• Expect continued sector rotation toward clear revenue leaders