Tech stocks are confronting a challenge they haven't had to worry about in a while

Core Insights - The current sentiment in the tech sector is characterized by "tech angst," primarily driven by concerns regarding software and the monetization of AI, leading to a cautious narrative among investors [1] - Long-biased tech investors are exhibiting a defensive posture not seen since the onset of the AI Revolution in late 2022 [2] Valuation Trends - Information technology stocks are trading at their lowest valuation premium to the S&P 500 in the post-pandemic era, with the "Magnificent Seven" stocks aligning with their post-pandemic average price-to-earnings multiples [3] - The price-to-earnings growth (PEG) ratio for megacap tech has fallen to 1.4 times, matching the low point reached in 2022, indicating potential valuation concerns [4] Earnings and Cash Flow Concerns - Investors are increasingly questioning the appropriateness of earnings-based valuations for AI-related stocks due to significant capital expenditures impacting free cash flows, leading to elevated price-to-free cash flow multiples [5] - Software stocks like Salesforce and Workday have experienced significant declines in 2026, down 14% and 12% respectively, reflecting broader concerns in the sector [5] Company Performance Highlights - Alphabet has shown resilience, with its shares up 5% in 2026 and a market cap exceeding $4 trillion, making it the best-performing member of the Magnificent Seven [6] - Nvidia, while still holding a market cap of $4.57 trillion, faces competition from Alphabet, which is positioning itself as a leading AI-centric stock for 2026 [7]