Why that $2 trillion software stock wipeout didn’t derail the AI bull market

Market Overview - S&P 500 futures increased by 0.18% before the market opened, following a 0.47% rise in the index yesterday, which is just below its all-time high, driven by strong earnings reports from S&P companies [1] - A stark contrast is observed between this week's bullish rally and last week's selloff, where $2 trillion was lost in market cap for software companies due to fears of AI disruption [2] Software Sector Analysis - The software sector experienced a significant non-recessionary drawdown of 34% over the past 12 months, resulting in a loss of approximately $2 trillion in market cap and a decrease in its weight in the S&P 500 from 12.0% to 8.4% [3] - Concerns regarding the disruptive impact of large language models (LLMs) have contributed to this decline, alongside aggressive de-risking and a pessimistic market sentiment [3] AI Impact and Corporate Strategy - The market is currently pricing in worst-case scenarios for AI disruption that are unlikely to occur in the next three to six months, as enterprise software remains integral to corporate operations, supported by long-term contracts and high switching costs [4] - Emerging evidence indicates that AI is more likely to enhance software workflows rather than replace them in the near term [4] Capital Expenditures (Capex) Trends - Major tech companies are significantly increasing their capital expenditures on AI, with hyperscalers' capex guidance for 2026 rising by 24%, amounting to an additional $117 billion compared to last year [8] - An estimated $1.3 trillion is projected to be spent on AI facilities through 2027, with $660 billion allocated for this year [8] - Hyperscalers have consistently outperformed consensus expectations for capex growth, with a 50 percentage point increase over the past year [9] Financing Strategies - Big tech companies are increasingly utilizing debt to finance their capital expenditures, with Alphabet issuing a rare 100-year bond for $20 billion [10] - Despite the rise in debt-funded expansion, the current levels remain below those seen in previous economic booms [10]