Is the sharp selloff in technology stocks this week the beginning of a Tech Wreck comparable to what happened from 2020 through 2022, when the tech bubble of the late 1990s burst and caused a recession (chart)? We doubt it because this time, the industry has many more profitable companies benefiting from the enormous capital spending on AI infrastructure by hyperscalers, including Alphabet, Amazon, and Microsoft. Collectively, these three companies are projected to spend approximately $490 billion on AI in 2026. Including Meta, the "Big Four" hyperscalers are forecast to spend roughly $650 billion.
That's freaking out investors, who are worrying that such massive spending might not pay off. However, all that spending in just this year will certainly provide lots of revenues and earnings to the companies that are vendors to the hyperscalers. The economy will also get a big boost from so much capex. Some of this spending might be delayed into next year if the data center projects are constrained by power and semiconductor availability.
Microsoft alone now carries roughly $625 billion in contracted but unrecognized revenue (RPO), reflecting unprecedented multi‑year AI and cloud commitments. Other hyperscalers also report rapidly expanding long‑term cloud contracts, though their RPO disclosures are not directly comparable.
The stress in the tech sector is having an adverse impact on the stock prices of the ETFs that include companies that specialize in private credit (chart).
There are no significant signs of stress in either the S&P 500 VIX or in the high-yield corporate spread (chart). They both were more elevated in 2000.
The mini tech wreck has weighed on the S&P 500 Growth stock price index. Investors have been rotating into the S&P 500 Value composite, which is at a record high (chart).
Also at or near their recent record highs are the DJIA and the DJTA (chart). So Dow Theory is confirming that the bull market remains intact.
The underperformance of the tech sector has caused the US MSCI to underperform the All Country World ex-US MSCI (chart).
Last week's relatively high readings of the Bull/Bear ratios we track signaled that a pullback in the US stock market was imminent (chart).
Meanwhile, the latest employment indicators remain subdued on balance. Last week's spike in initial unemployment claims was probably attributable to the severe winter storm that hit much of the country. In December, hires and separations were equal at 5.3 million. Both quits and layoffs remain relatively low (chart).
Job openings continued to decline in both December and January, as the churn in the labor market has slowed (chart).
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