“Summer nights and long warm days , Are stolen as the old moon falls, And my mirror shows another face, Another place to hide it all”
–Seasons, Chris Cornell, 1992
The party is over. After a three-year rager in the technology sector fueled by a mosh pit of Artificial Intelligence (AI) euphoria, the long overdue hangover is now setting in. The AI party is now over, and the AI arms race is now underway.
Here is the new fundamental reality. Over the last several years, having some semblance of an attachment to the rise in AI assigned to your company was a fast-track way to notch a 2x to 3x or more on your stock price. You might not even be generating revenue yet from your dream AI innovation – if your idea was good enough, the investor demand was there (how very “dot.com” of investors – will we ever learn?). Granted, revenue and earnings growth have been rolling in for many of the leading players, as this boom has been legit and real. But like every great party, eventually it must come to an end, and such is the juncture we have arrived at today. The boom in AI has entered a phase where structural under investment now means strategic irrelevance. It’s either kill or be killed, and this new arms race includes much of the Mag 7 and the biggest companies in the world. Gone are the summer nights and long warm days of copious free cash flow growth across the tech landscape. Stolen in its place is a record torrent of capital expenditures and asset growth funded by any available cash flows, off balance sheet funding initiatives and century bonds. Like any arms race, winners will be crowned and losers will be left to join former tech heavyweights like Eastman Kodak, Sperry, DEC, and Wang among others in the dustbin of stock market history. NVIDIA will be differentiated from Microsoft that will be differentiated from Amazon that will be differentiated from Meta that will be differentiated from Oracle and so on, and not all will be winners.
“And I’m lost, behind, The words I’ll never find, And I’m left behind, As seasons roll on by”
–Seasons, Chris Cornell, 1992
A new season underway. So what does the new tech reality look like as we work through the winter of 2026? The old moon first started falling on the tech sector all the way back around Halloween, and the storm clouds are slowly continuing to accumulate. Consider the chart below showing the cumulative return of the S&P 500 versus the Information Technology sector since October 30, 2025. While the S&P 500 is essentially flat at up less than +1% over this time period, the tech sector is lower by nearly -8%.
At first glance, this almost sounds like perma-bearish hyperbole. The tech sector has been higher by +150% since October 2022, and this Chief Market Strategist is sounding the alarm bell after a down -8% in less than four months. Really? I initially look askance at myself in the mirror. But here’s the thing. I’ve been a steady defender of the prospects of the tech sector more specifically and the broader market in general during past downturns. Why? Because the underlying economic and corporate earnings fundamentals supported it. And when considering these fundamentals today, they remain highly supportive – the latest reading on GDP was soft but still positive, and corporate earnings are still forecasted to rise at a double-digit annualized rate. So why the consternation? Because the underlying reality is quickly changing, as free cash flows across the tech sector are evaporating before our eyes and leverage is accumulating at a breakneck pace. We’ve seen this story before, most recently during the dot.com era a quarter century ago, and rosy profit forecasts can quickly give way to actual earnings declines in a blink of an eye under such conditions. As a result, keeping a close watch on individual tech company fundamentals will be key in the coming months as we progress through 2026.
“Sleeping with a full moon blanket, Sand and feathers for my head, Dreams have never been the answer, And dreams have never made my bed”
–Seasons, Chris Cornell, 1992
Let’s continue with a closer look at the technicals starting with the technology sector itself.
So much in the chart above is textbook for a sector that has been in a slow rolling over process for months. After peaking around Halloween, the tech sector has been slowly fading with a successive series of lower highs and lower lows. Fading relative strength (RSI) and momentum (MACD) over this same time period confirm this weakness. In the process, the sector has broken support at its medium-term 50-day moving average (blue line in chart above) that has now become resistance as it clings to long-term 200-day moving average support (red line in chart above). Now the bullish counterpoint to this bearish presentation is that the tech sector is currently in nothing more than a flag pattern as it consolidates previous gains in reloading for its next advance to the upside. This may very well be the case, and we should know the outcome soon as the now downward sloping 50-day moving average falls toward the still upward sloping 200-day moving average with tech stocks wedged in between. Break to the upside, and it’s back on like Donkey Kong. Break to the downside, and an official bear market in technology stocks (down -20% from previous highs) could soon come into view.
An additional point of concern for tech shares. The NASDAQ 100 where all of the biggest name in technology hang out has been highly correlated with cryptocurrencies for more than a decade now. This is reflected in the chart below. Thus, it is notable that cryptocurrency prices have been struggling mightily since the middle of last year. Will the cryptocurrency implied price of the NASDAQ 100 eventually follow? Only time will tell, but it’s worth watching crypto prices in the coming weeks for any renewed life and subsequent reassurance that tech may be able to hold its ground instead of succumbing to the downside.
“Well I want to fly above the storm, But you can’t grow feathers in the rain”
–Seasons, Chris Cornell, 1992
The weakness in tech has important implications for the broader market as measured by the market cap weighted headline benchmark S&P 500 Index (that’s a lot of adjectives!). Why? Because amid all the tech euphoria, the sector and its adjacent names in communication services, consumer discretionary, and even financials have grown to make up more than 40% of the S&P 500. As a quick aside, a classic rule is that any time a sector grows to become more than 20% of the S&P 500, trouble for the sector is likely to follow. Thus, at more than 40%, we remain in rarified air. Let’s take a look at the charts.
The S&P 500 has clearly been looking gassed in the last five months. After peaking just before Halloween, the benchmark index has chopped back and forth in the time since. And it’s very possible that a “U” shaped top could continue to form. Perhaps “7000+ GO LIKE HELL” will give way to “7000+ MULTIYEAR PEAK”. Only time will tell.
“If I could be short on words, But long on things to say, Could you crawl into my world, And take me worlds away”
–Seasons, Chris Cornell, 1992
Bullish. Enough of this bearishness! Let’s talk about the good stuff. This is arguably the most exciting start to a calendar year we’ve seen in years. Why amid this gathering technology cloud? Because just about everything else is working in spades. Consider the equal weighted S&P 500 (remember those adjectives from above), the mid-cap S&P 400, and the small cap S&P 600 indices, or effectively the rest of the U.S. stock marketplace that have been hanging out at home plugging away while the tech sector was raging. Surging higher all by nearly double digits since Halloween. This helps explain why more than 61% of stocks in the S&P 500 are outperforming the underlying index year-to-date. The long overdue broadening of market performance is underway.
Developed international and emerging stocks? Doing even better up double-digits since Halloween.
Commodities like gold, copper, and oil? En fuego.
Even boring old bonds are outperforming the S&P 500 and the tech sector since Halloween.
In short, there is a lot to get excited about in the stock market today. It’s just tough to see it because the big tech sector cloud is hanging so heavy on the S&P 500 right now. Such are the merits of broad portfolio diversification, as it enables investors to enjoy the summer nights and long warm days that are continuing through the winter of 2026.
“As the seasons roll on by, yeah”
–Seasons, Chris Cornell, 1992
Bottom line. The tech sector that has dominated the minds and hearts of so many investors for so long may be entering a new season where winners will be separated from losers. But even if increasing volatility and downside comes to this market leading space, the opportunity will remain to continue to pursue the winners in the AI revolution while also benefiting from broad portfolio diversification as capital flows like Cuervo through the rest of the financial marketplace.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.
LPL Compliance Tracking #1072192.