Technology stocks are back to being the red-hot market leaders. But in the past couple decades, the Tech sector has become so large and broad that the term “Tech stocks” isn’t as descriptive as it used to be, and there are themes playing out under the surface that are easy to overlook.
After the dot-com bubble burst in the early 2000s, Technology stocks fell from 30% of the S&P 500 to 12%. Since then, the Technology sector has grown all the way back to a 30%+ allocation in the S&P 500.1 If you include Silicon Valley giants Alphabet and Meta (in Communication Services), and Amazon (in Consumer Discretionary), the true “Tech” allocation in the stock market is even larger.
This time around, the increase has been driven by a major expansion in the breadth and profitability of the technology industry itself. Over the past two decades, the Tech sector has evolved from a relatively concentrated group of companies into a broad ecosystem spanning Hardware (think Apple and Cisco), Semiconductors (Nvidia, Intel, and AMD), and Software (Microsoft, Salesforce, and Adobe). Each of which have different business models, growth drivers, and customer bases.
Software names had a particularly strong period from approximately 2012-2020 with the rise of cloud computing and the software-as-a-service or “SaaS” which offered investors compelling economics with asset light business models. SaaS stock leadership began to fade in 2021 when supply chain crunches gave hardware and semiconductor companies the upper hand. Nonetheless, all 3 subsector performance remained directionally similar.
That all changed in late 2025. After peaking in late October of last year, software stocks are down 20% (as of mid-May) while Tech Hardware stocks are +22% and Semi stocks are +30% since then. The large gap appears on a year-to-date basis also with software stocks down approximately 14% while Hardware has gained +23% and Semis have gained almost 40%.
Why? Fears about Artificial Intelligence and how it could decimate the software industry itself. The collective realization occurred in late 2025 with the release of Anthropic’s AI coding tool “Claude Code”. After its release, it became clear that software building would be forever changed. Instead of highly paid human coders typing out computer code—a tedious and time-consuming task—it now appeared that coders would only be needed to steer and supervise writing of code which would largely be done by AI. This massive reduction in software “cost”, fueled the idea that enterprise level software could be easily insourced by corporate customers themselves. And maybe more importantly, even the threat of this would cap the annual price increases that SaaS companies regularly commanded.
Of course, there are competing narratives too. Software executives are doing their best to downplay the potential risk that AI poses, and in many cases have argued that AI will actually help software companies, not hurt, given one of their largest costs is set to fall dramatically. Just as coding efficiency could allow enterprise customers to build internal software more easily, AI coding tools also help software companies build a more compelling software product that would outperform what a customer could build itself. Additionally, there isn’t much evidence to support the idea that enterprise customers are fleeing these software providers, and their earnings results have remained reasonably solid. In Q1 2026, software companies collectively grew their earnings by +19% YoY, a reasonably solid figure and compares to +31% for full year 2025 and +12% for full year 2024. Of course, earnings results are backwards looking and investors are forward-looking, so it will likely take many quarters to see if a decipherable trend emerges.
So as of late-May 2026, the jury is still out. Investment themes have a tendency to be oversimplified with binary outcomes, but ultimately what plays out may be more nuanced. It could be true that AI is the death knell for certain software companies, but is a boon for other software companies. Regardless, what is unique about today versus past Tech narratives is that this a story of Tech impacting Tech versus past eras where Tech disrupted non-Tech industries.
1 Based on GICS® sectors as of May 29, 2026. S&P 500® - S&P Dow Jones Indices. www.spglobal.com. https://www.spglobal.com/spdji/en/indices/equity/sp-500/#data
Data from all other above referenced percentages is from YCharts.
