Software Sector Feels the Pain as Market's Patience With Microsoft Thins
Microsoft slumps on AI spending while Meta and Apple lift tech sentiment in a volatile market shakeup.
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Microsoft’s (MSFT) earnings report triggered aggressive selling in AI-related software stocks on Thursday. It turned out that the bears were partially correct about the lack of return on the massive capex spending taking place. While Microsoft beat on the top and bottom lines, its $37.5 billion in capital expenditures — a 66% jump — and slowing Azure growth spooked a market that is losing patience with the "spend now, profit later" playbook.
Ad Tech Wins the AI ROI Race
Meta (META) demonstrated how to get some "bang for their buck" by focusing on advertising. Its stock surged 8% as it showed that AI is already driving a 24% revenue jump through better ad targeting and recommendation systems. Microsoft, by contrast, is focused on software development and enterprise infrastructure, which simply doesn't deliver the quick, measurable return that annoying and endless advertising provides.
This disappointment triggered a rerating across the software sector. While names like Intuit (INTU) and Workday (WDAY) were sold, money rotated into Meta, Applovin (APP) , and Shopify (SHOP) , all of which are clear beneficiaries of AI-enhanced commerce and ads.
Market Resilience and the Afternoon Bounce
The good news about the poor action on Thursday was that it was fairly narrow and featured a solid afternoon recovery. At the closing bell, 47% of stocks were positive, the Russell 2000 (IWM) managed to finish in the green, and the Nasdaq 100 (QQQ) cut its early losses to just 0.6%.
We saw some sympathy selling in various pockets, but the software group honestly needed a shakeup. Valuations had become extreme in several names, most notably Palantir (PLTR) , and this reset helps clear the froth.
Apple’s AI Moment and 'Blow-Out' Reports
The issue now is Apple's (AAPL) influence on the AI sector. Apple has been a laggard in implementation, but its recent deal with Alphabet (GOOGL) to use Gemini AI for various applications is a major catalyst.
In its report after the close, Apple was solidly ahead of estimates on both the top and bottom lines, reporting $138.4 billion in revenue. The stock popped about 3% immediately on the headline as buyers looked for an excuse to jump back into this favorite. However, it faded quickly as the market waits for more details on the conference call.
Technically, the stock is testing key support at its 50-day moving average. If it can hold this level and raise guidance during the call, it could regain its leadership role and calm broader AI nervousness.
We also saw impressive after-hours reports from Sandisk (SNDK) and Deckers Outdoor (DECK) , which should help sentiment heading into Friday.
The Bottom Line
The early selling on Thursday was "top-down" action that punished many innocent stocks. Many of them bounced back, though some technical damage was done to the charts. With many of these names yet to report, there are opportunities for those who know their fundamentals. I remain positive about overall market conditions and view this shakeup in the AI software group as a healthy way to address valuation issues.
At the time of publication, DePorre was long GOOGL and AMZN.
