AI Hype Meets Reality: Why Software Stocks Are Stalling as Wall Street Hunts for Yield

If you want to see what happens when narrative momentum collides with the cold steel of market gravity, look no further than the current state of software and AI stocks. For the better part of two years, the AI trade has been the market’s golden child, immune to macro headwinds, impervious to valuation gravity, and seemingly fueled by an endless supply of retail and institutional FOMO. But as of February 6, 2026, the music has stopped. The average software stock, according to Seeking Alpha, is now down from the infamous 'Tariff Tantrum' lows, and even the mighty AI cohort is showing signs of exhaustion. The Strykr Pulse is flickering yellow, not green.

The facts are hard to ignore. The Russell 1,000’s average stock is still up roughly 37% since the April 8, 2025 lows, but software names are lagging badly. The tech-heavy XLK ETF is frozen at $135.6, flatlining for days as traders rotate out of growth and into anything with a yield over 4%. Wall Street Journal’s latest dispatch calls boring companies 'a lot more interesting' after the AI-driven rout in highflying tech shares. The market’s favorite narrative, AI will eat the world, and you must pay up for the privilege, is now being challenged by the oldest story in finance: gravity.

The rotation is not subtle. Dividend stocks are suddenly the belle of the ball, with Seeking Alpha touting the Invesco S&P 500 Equal Weight ETF (RSP) as a 'Strong Buy' to capture the rotation from growth to value. Utilities with over 4% yields are getting analyst upgrades. Even the Super Bowl is a dividend event, with beverage and snack companies like Anheuser-Busch InBev and PepsiCo getting a pre-game bid. Meanwhile, AI stocks are stuck in a holding pattern, with the hype 'off the charts' but the price action anything but.

If you’ve been trading long enough, you know this movie. The last time software stocks underperformed this badly, the market was bracing for a Fed-induced recession that never quite arrived. But this time, the rotation feels more structural. With rates still elevated and the Fed showing no urgency to cut, capital is flowing to companies that pay you to wait. The AI narrative is not dead, but it’s definitely on mute. The average software stock is now below its 50-day moving average, and the XLK ETF is flirting with a breakdown below $135, a level that has held since the Q4 earnings season began.

The context is clear: the market is repricing risk, and software is the sacrificial lamb. The days of paying 30x sales for a company with negative free cash flow are over, at least for now. The AI trade has become crowded, and the unwind is orderly but relentless. Cross-asset flows show money moving into defensive sectors, with utilities and consumer staples outperforming tech for the first time in years. The S&P 500 is nearing key support at its 200-day moving average, with a -7% correction likely setting up new all-time highs later this year, according to Seeking Alpha. But don’t expect software to lead the charge.

So what’s the real story? The market is not abandoning tech, but it is demanding proof of life, real earnings, real cash flow, real dividends. The AI narrative is still powerful, but it’s no longer enough to move the needle. Traders are looking for solid ground, and software stocks are not providing it. The rotation into value and yield is not a fad, it’s a rational response to a world where the cost of capital is no longer zero. The market is clearing speculative excess, and software is the first stop on the road to normalization.

Strykr Watch

Technically, the XLK ETF is the canary in the coal mine. The $135 level is critical support, with a break below opening the door to a retest of the $130 area. The RSI is stuck in neutral territory, reflecting the market’s indecision. Volume is drying up, a classic sign of distribution rather than accumulation. The 50-day moving average is now resistance, not support. If you’re looking for a bounce, you want to see XLK reclaim $137 on convincing volume. Until then, the path of least resistance is lower.

Software names are even uglier. The average stock in the sector is below its 200-day moving average, and the bid-ask spreads are widening as liquidity dries up. Watch for capitulation volume, if you see a spike in volume on a down day, that’s your signal that the unwind is reaching its climax. Until then, patience is a virtue.

The risk is that the rotation accelerates, with money fleeing tech and chasing yield wherever it can find it. If XLK breaks $135, look for a quick move to $130. On the upside, a reclaim of $137 would signal that the worst is over, at least for now. But don’t expect a V-shaped recovery. The market is in no mood to reward hope over hard data.

The bear case is simple: rates stay high, growth slows, and software multiples compress further. If the Fed surprises with a hawkish tilt, the unwind could get ugly. The bull case? A soft landing and a return to growth, but that feels like a long shot with the current macro setup.

Opportunities are emerging for traders willing to fade the crowd. If you’re nimble, look for oversold names with real earnings and strong balance sheets. Avoid the high-flyers with no path to profitability. The best trades will be in the laggards that have been thrown out with the bathwater, not the former darlings that are still trading at nosebleed multiples.

Strykr Take

The AI trade is not dead, but it’s on life support. The market is demanding substance over story, and software stocks are paying the price. The rotation into yield is not a head fake, it’s the new reality. If you’re still chasing the AI hype, you’re late to the party. The smart money is already looking for the next rotation. Don’t be the last one holding the bag.