The previously booming AI sector has encountered some obstacles. Certain analysts view this as an 'excellent' indicator.

Main Insights

• The AI sector faced significant challenges this week as Alphabet and Amazon announced enormous increases in AI-related spending, raising doubts about the potential returns. At the same time, new offerings from Anthropic triggered a sharp decline in software stock prices.

• According to some analysts, the recent market activity represents a necessary adjustment, as previous expectations on Wall Street may have become overly optimistic.

While AI once boosted nearly every company, its impact now appears more mixed, benefiting some while dragging down others.

Growing apprehension among investors is paralleling the surge in AI investments by major tech firms. Even minor uncertainties are now causing significant volatility in stock prices. Over the past two weeks, the four leading cloud providers—Meta (META), Microsoft (MSFT), Alphabet (GOOG, GOOGL), and Amazon (AMZN)—have all revealed plans to ramp up their investments in AI infrastructure.

Both Alphabet and Meta have indicated that their infrastructure budgets for this year will be roughly twice what they spent last year. Amazon projected that its capital expenditures will reach $200 billion in 2026, a 50% increase from the previous year and $50 billion above Wall Street’s forecasts. Microsoft did not specify an exact figure, but its capital spending is expected to remain at the elevated levels seen last quarter, which was more than 60% higher than before.

Gina Martin Adams, Chief Market Strategist at HB Wealth Management, noted, “Just as we saw last earnings season, these tech giants continue to raise their capital spending targets. And, as before, there are growing questions about whether these investments will ultimately deliver the desired returns.”

Significance of Recent Developments

Fears of an AI-driven market bubble weighed on technology stocks during the latter half of last year. Some experts believe that this week’s sell-off has helped ease some of that pressure and recalibrate expectations that had become too high.

Wall Street’s ongoing skepticism about the profitability of these AI investments has been evident for weeks. Meta’s stock surged after reporting that AI tools had boosted ad impressions and engagement, leading to faster ad revenue growth. In contrast, Microsoft and Amazon saw their shares drop following disappointing results in cloud computing, which is closely tied to AI expansion.

Unlike previous quarters, investors are now not only debating which companies will benefit most from AI, but also which might lose out.

This concern particularly affected software companies last month, with firms like Intuit (INTU) and Salesforce (CRM) experiencing declines amid worries that new AI technologies and trends like “vibe coding” could disrupt the software-as-a-service (SaaS) model. These anxieties escalated into a broader sell-off this week after Anthropic introduced AI tools for legal work. By Thursday, the S&P Software & Services Index had dropped over 20% since the beginning of the year.

Market Reactions and Future Outlook

Many industry leaders and analysts argue that the recent sharp downturn in software stocks—dubbed the “SaaSpocalypse”—is an overreaction. Nvidia CEO Jensen Huang, speaking at an event on Wednesday, dismissed the idea that AI would replace the software industry as “illogical.” Nevertheless, the pullback may indicate a shift in how Wall Street views AI’s role.

“For the past three years, trading was driven by the promise of AI as it was being developed,” Adams explained. “Now that AI is being implemented, there’s more focus on the economic impact and the potential for industry disruption.”

Some analysts view this reassessment of AI’s prospects as a positive step for the market. Adams pointed out that this week’s trading has helped alleviate some of the AI bubble concerns that persisted through the latter half of 2025. “Currently, tech stocks are trading at just a 10% premium to the broader market, which I see as a healthy sign,” she said.

By Friday, investor confidence appeared to be returning, with technology stocks leading a broad market rally. Despite the pressure on profit margins, tech giants continue to pour hundreds of billions into data center infrastructure, benefiting their suppliers.

For example, memory chip manufacturers have seen their earnings soar over the past year, fueled by demand from AI data centers. Sandisk (SNDK) shares have climbed nearly 150% since the start of the year.