AI Capex Shockwaves: Why the Software Rout Could Be the Canary for S&P 500 Bulls

There’s a special kind of market hangover that only comes after a party thrown by Silicon Valley’s finest. The confetti hasn’t even settled from last quarter’s AI-fueled earnings bonanza, and already traders are waking up to the dull ache of regret. Asian equities took the first punch, with South Korea’s circuit breakers tripping before the sun rose over London. But the real story isn’t just a few battered tech names in Seoul or Jakarta’s Moody’s-induced migraine. The global software selloff is acting like a canary in the coal mine for the S&P 500’s most crowded trade: the AI capex supercycle.

Let’s not pretend this is just about a few over-extended momentum names. The headlines are everywhere: “Tech-led selloff drags Asian stocks,” “Software selloff deepens,” and, most tellingly, “Anthropic tanked the market.” When a startup’s funding round can move the entire sector, you know the market’s pricing in a future that’s more science fiction than spreadsheet. But now, as the dust settles, the question is whether this is a healthy rotation or the first crack in the narrative that’s powered the S&P 500 since 2022.

The facts are blunt. XLK, the S&P 500’s tech ETF, is frozen at $135.6. No bounce, no breakdown, just a stalemate. The last time we saw this kind of price action was in the dog days of 2021, right before the market realized that infinite cloud spend wasn’t, in fact, a business model. Asian markets are already blinking red: South Korea’s KOSPI halted, Indonesia’s equity market down more than 2% after Moody’s cut its outlook, and circuit breakers firing like it’s 2008. Meanwhile, U.S. software names have been hammered for days, with Bloomberg reporting a deepening rout and options markets lighting up with put activity. The AI trade that looked bulletproof last quarter suddenly feels like it’s running on fumes.

Of course, the macro backdrop is hardly helping. The Fed is in transition, with Kevin Warsh’s nomination injecting a fresh dose of hawkish anxiety. Warsh’s reputation as a monetary hardliner has traders dusting off their 2018 playbooks and wondering if Powell’s “higher for longer” mantra is about to get a steroid injection. The result? Risk assets are on the defensive, and the S&P 500’s tech-heavy leadership is starting to look more like a liability than a lifeline.

What makes this moment different is the scale of the AI capex binge. Microsoft, Alphabet, Amazon, everyone is spending like it’s the last days of Rome, betting that every dollar poured into GPUs and data centers will pay off in exponential growth. But as the Wall Street Journal pointed out, “growing investor anxiety over massive AI capex plans” is starting to eat into sentiment. The market is finally asking the question it should have asked months ago: what if the returns on AI investment are years away, not quarters?

Historically, tech-led rotations have been both a blessing and a curse for the S&P 500. In 2020, software multiples expanded to nosebleed levels, only to implode when rates started to rise. The current setup feels eerily similar. The S&P 500 is still hovering near record highs, but breadth is thinning, and the leadership is getting dangerously narrow. Utilities, energy, and industrials are starting to outperform on a relative basis, as traders rotate out of the AI trade and into sectors with actual cash flows. This isn’t just a U.S. phenomenon. Asian and European markets are echoing the same theme: tech out, defensives in.

Options flows are telling their own story. Put volumes on XLK and major software names have surged, with implied volatility spiking to levels not seen since the regional bank panic last year. The market isn’t just hedging, it’s betting on a real correction. And with earnings season winding down, there’s no obvious catalyst to reignite the AI narrative in the near term.

The risk, of course, is that this rotation turns into a rout. If the S&P 500 loses its tech leadership, there’s not much left to hold up the index. Financials are still digesting higher-for-longer rates, energy is hostage to OPEC headlines, and industrials are only as strong as the next PMI print from China. The AI capex story was supposed to be the rising tide that lifted all boats. If that tide goes out, we’ll see who’s been swimming naked.

Strykr Watch

Technically, XLK’s $135.6 level is the definition of no man’s land. It’s pinned between short-term support at $134 and resistance at $138. The 50-day moving average is flatlining, while RSI is stuck in neutral territory around 48. Breadth is deteriorating, with fewer than 40% of XLK components trading above their 20-day moving averages. For the S&P 500, the key level is 4,950. A break below that opens the door to 4,800, while a reclaim of 5,000 would signal the bulls are back in control.

Options markets are pricing in a 2.5% move for XLK over the next week, with skew heavily tilted toward puts. If you’re looking for confirmation, watch for a spike in volume on a break of $134. That’s where the real selling could accelerate. On the upside, any close above $138 would force a short squeeze and reset the narrative.

The risk is that this technical stalemate turns into a volatility event. If circuit breakers start tripping in U.S. markets the way they did in Asia, all bets are off. Keep an eye on VIX futures and cross-asset volatility. If they start to spike, the rotation could turn into a full-blown correction.

The bear case is straightforward. If the AI capex story unravels, there’s not much left to support current valuations. Earnings revisions are already drifting lower, and the Fed is in no mood to bail out risk assets. If Warsh gets confirmed and signals a more hawkish stance, expect a repricing across the board. The S&P 500 could easily retest 4,800 in that scenario.

On the flip side, there’s still an opportunity for nimble traders. If XLK holds $134 and the S&P 500 stays above 4,950, this could be a textbook buy-the-dip setup. Look for signs of capitulation in options markets and watch for rotation back into software names with real earnings growth. If the AI narrative gets a new catalyst, say, a blockbuster product launch or a surprise earnings beat, the rally could reignite in a hurry.

For now, the best trades are tactical. Long defensives against tech, short high-multiple software names, and keep stops tight. If the market gives you a bounce, don’t overstay your welcome. The days of easy money in AI are over, at least for now.

Strykr Take

This isn’t the end of the AI trade, but it’s a reality check. The market is finally waking up to the risks of the capex supercycle, and the S&P 500’s tech leadership is looking shaky. For traders, the message is clear: respect the rotation, manage your risk, and don’t bet on a one-way street. The next few weeks will separate the true believers from the bagholders. Stay sharp.

datePublished: 2026-02-06 06:30 UTC