From Best To Worst: The Narrative For Technology
By: Arnav Goel - Investment Team, TMT Industry
Contributing Editors: Nathan Li, Caden Warner
Once the market's crown jewel, technology has become the most scrutinized sector in 2026 as AI disruption rewrites the rules of valuation.
Fueled by numerous tailwinds such as AI driven demand, a supportive macro backdrop, and continued capital expenditures by hyperscalers, technology stocks had high expectations leading into 2026. However, a sector that outperformed the broader S&P by roughly 7% in 2025, has now become a gross underperformer, down 4% year to date. So what happened? With the new year came a whole host of new headwinds for tech including the broadening out trade, a new, nuanced AI valuation approach, software cannibalization worries, bubble unwind, and even dystopian articles, causing billions in market capitalization to disappear in a matter of days. This isn’t unusual. Positions get crowded, investors rotate their capital, valuations drop, people reinvest, creating a feedback loop. Expectations get high, investors get jumpy and sell. Still, this cycle just feels different…
Take the dynamic between sentiment and fundamentals. On the one hand, fundamental focused investors look at inflated valuations and run towards industrials and energy. On the other, sentiment focused investors ride the wave of tech stocks as they move into the print. The paradigm however, has shifted due to AI risk and disruption. Investors are now looking at a company’s individual disruption risk, expected cash flows, propriety, etc, to ensure they are not investing in a firm whose whole product line will be displaced in 6 months by a new advancement in artificial intelligence (software cannibalization for example). This has led to a shift from “multiple expansion” to “earnings justification”. At the same time, fundamentals are completely ignored the minute a new, shiny tool from Claude or OpenAI is released, sending stocks with any exposure into catastrophic declines. AI now has become a catalyst and a threat. Technology’s own innovation is proving to be its demise.
The story in 2024 and 2025 for hyperscalers followed a simple pattern: invest in AI (data centers, GPUs from NVIDIA, etc), commit to more spending, watch their respective stock soar. And for a while, this was the case until late 2025 into 2026 where investors began questioning if returns from the billions spent are going to be fruitful. The AI buildout is not asset-light. Data centers, GPUs, networking infrastructure, and long-term energy contracts require staggering amounts of upfront investment. Depreciation schedules are long, yet innovation cycles are shortening. When billions are committed before monetization is fully visible, skepticism naturally increases.
Ultimately, this is less a collapse and more a recalibration. The era of easy multiple expansion has given way to earnings justification. The macro backdrop may be supportive, but innovation risk has introduced a new variable: disruption velocity. Technology is not failing, but is instead being stress-tested. The companies that convert AI from narrative to tangible cash flow will separate themselves from those riding momentum. In 2026, it’s simple: proof over promise.