AI Hype Hangover: Are Software Stocks Facing a Lost Year as Investors Rotate to Old Economy Plays?

If you want to know what happens when the market’s favorite narrative collides with the reality of cash flow statements, look no further than the carnage in software and AI-exposed stocks this February. The year started with all the subtlety of a fire alarm: the so-called “AI darlings” that carried 2025’s risk rally have been unceremoniously dumped for the Dow’s graybeards, leaving tech sector ETFs like XLK stuck in neutral at $141.06. This is not a gentle rotation. It’s a stampede out of the future and into the arms of companies that still make things you can drop on your foot.

The numbers tell the story. Since the turn of the year, software and AI names have been battered, with the sell-off accelerating in February as investors started to question whether all those capex splurges on AI infrastructure will ever deliver the promised returns. According to Benzinga, the exodus from software has been sharp, while MarketWatch notes a “growing divide” in the market, with old-economy stocks outpacing their digital cousins. The S&P 500 Equal Weight Index hit a new all-time high, a sign that breadth is back, but not in the way tech bulls would like. Meanwhile, the Dow Jones just notched its own record, blowing past 50,000 as if to say, “Remember us?”

The context here is everything. For most of the last decade, tech stocks have been the only game in town. The AI narrative, turbocharged by generative models and hyperscaler spending, was supposed to deliver another leg higher. Instead, we’re seeing the market punish companies that are still burning cash to chase AI dreams. The hyperscalers’ $650 billion spending spiral, as MarketWatch put it, is starting to look less like visionary leadership and more like existential panic. The market’s verdict so far: show us the money, or we’ll show you the door.

What’s different this time is the speed and violence of the rotation. The old playbook, buy tech on any dip, has failed spectacularly. The XLK ETF has gone nowhere, flatlining at $141.06 for days, while the Dow and equal-weight indices rip higher. The market is sending a message: capital is finite, and patience for “growth at any price” is exhausted. The AI trade isn’t dead, but it’s been put on probation.

This isn’t just about sector rotation. It’s a referendum on the entire AI investment thesis. Investors are asking tough questions: Will these massive infrastructure bets ever pay off, or are they just the latest chapter in Silicon Valley’s long history of overpromising and underdelivering? The hyperscalers are barreling ahead, but the market is no longer giving them a free pass. If you’re not printing cash now, you’re out of the club.

The technicals aren’t offering much comfort to the bulls either. XLK is pinned below its 50-day moving average, with RSI languishing in the mid-40s. The ETF hasn’t seen a meaningful uptick in volume, suggesting that buyers are still on strike. Meanwhile, the Dow is making new highs, and the equal-weight S&P is confirming the rotation. Breadth is improving, but it’s the kind that leaves tech investors feeling like they’ve been left behind at the station.

Strykr Watch

For traders, the levels are clear. XLK faces stiff resistance at $143, with support at $138. A break below $138 opens the door to a retest of the $132 zone, while a close above $143 could spark a relief rally. But with momentum indicators still weak and no catalyst in sight, the path of least resistance looks lower. The Dow, by contrast, is in blue-sky territory, with no obvious ceiling until profit-takers step in. The S&P 500 Equal Weight Index is the one to watch for confirmation of continued rotation.

The risks are obvious. If the hyperscalers double down on spending without delivering results, the market could punish them further. A hawkish Fed or a macro shock could accelerate the unwind. And if tech earnings disappoint again, the rotation could turn into a rout. On the flip side, any sign that AI investments are starting to pay off could bring the buyers back in a hurry. But right now, the market is in “show me” mode.

For those willing to play the rotation, there are opportunities. Shorting XLK on rallies to resistance, or going long old-economy sectors like industrials and financials, could pay off. The equal-weight S&P is a stealth winner, offering exposure to the broadening rally without the tech baggage. For the brave, a tactical long in XLK with a tight stop below $138 could work if we see a reversal, but don’t bet the farm.

Strykr Take

This is not your father’s tech correction. The market is sending a clear message: AI hype is no substitute for profits, and the rotation into old-economy stocks has real teeth. Until the hyperscalers prove they can turn spending into earnings, expect more pain for software and AI names. For now, the smart money is following the breadth, not the buzzwords.