Tech stocks tumbled on Thursday as Microsoft’s disappointing earnings report sent software shares into bear market territory, raising fresh concerns about massive AI spending among major technology companies. The software sector decline was particularly pronounced, with investors questioning whether tech giants are investing too heavily in artificial intelligence without generating sufficient returns in other business areas to justify the expenditure.
Microsoft shares plummeted 10% following the company’s earnings announcement, which revealed record AI spending coupled with slowing cloud growth and weaker-than-expected profit guidance for the upcoming quarter. The iShares Expanded Tech-Software Sector ETF dropped more than 20% from its October peak, officially entering bear market territory.
Microsoft Earnings Trigger Broader Market Selloff
The negative reaction to Microsoft’s results dragged down major indexes across the board. According to market data, the S&P 500 fell more than 1%, retreating from the 7,000 mark it had briefly surpassed for the first time on Wednesday. Meanwhile, the Nasdaq Composite dropped 2% as tech stocks sold off broadly.
Joee Mazzola, head trading and derivatives strategist at Charles Schwab, noted that “Microsoft was the black sheep with losses” when compared to more positive earnings from fellow Magnificent Seven members Tesla and Meta. The contrast was particularly striking given that Meta had also announced robust capital expenditure guidance but was rewarded by investors due to strong advertising performance.
AI Investment Concerns Take Center Stage
Investors have grown increasingly sensitive to indications that artificial intelligence demand may not meet initial market expectations. Capital expenditure spending among tech giants has emerged as a focal point of worry, given uncertainties surrounding monetization strategies and the timeline for realizing returns on AI investments.
David Morrison, senior market analyst at Trade Nation, wrote in a Thursday morning note that Microsoft’s earnings likely “reinforced fears that a return on AI investment may be slow in coming.” The company faces pressure to demonstrate that its substantial AI investments are yielding tangible results.
Additionally, analysts at UBS noted earlier this week that Microsoft needs to “prove” it is making sound investments in its AI initiatives. The bank highlighted a particular challenge: “Microsoft has elected to increase the allocation of new GPU compute to its 1P efforts, effectively throttling Azure growth, because of its confidence in monetizing Copilot. The challenge for the stock is that many investors don’t buy into that trade-off.”
Analysts See Buying Opportunity Despite Selloff
However, several market analysts suggested that Thursday’s sharp decline may represent an overreaction to the earnings report. Wedbush Securities analysts, led by prominent tech bull Dan Ives, stated: “We believe that any weakness this morning post print represents strong buying opportunities for long-term investors.”
The Wedbush team added that “2026 remains the true inflection year of AI growth for Microsoft as the company continues to see growth head in the right direction while aggressively investing in capturing this massive opportunity.” This perspective suggests that near-term pain could give way to longer-term gains as AI monetization accelerates.
In contrast to the pessimistic market reaction, analysts at William Blair said they continue to see Microsoft “expanding its enterprise footprint” with growing opportunities in AI copilots and agents. Mizuho analyst Gregg Moskowitz pointed out that the IT giant expects capital expenditure to decline sequentially, potentially addressing investor concerns about runaway spending.
Moskowitz maintained an optimistic outlook, writing: “We remain ever-confident that MSFT’s revenue growth opportunities over the medium-term and beyond are greater than many realize, and we remain very bullish on its tangible AI adoption and monetization levers.” All three firms—Wedbush, William Blair, and Mizuho—maintain “outperform” ratings on Microsoft stock.
Market observers will be closely monitoring upcoming earnings reports from other technology companies to determine whether Microsoft’s challenges represent an isolated incident or a broader trend affecting the sector’s AI investment thesis.
