"Hope for the entire market"! U.S. tech stocks have fallen into their worst start since 2022, and NVIDIA's performance is key to reversing the downturn

U.S. tech stocks started 2026 with a slowdown, becoming a key variable suppressing the market's upward movement, while Nvidia's upcoming earnings report is seen by the market as crucial for reversing sentiment.

Nvidia will release its quarterly results after the U.S. stock market closes on Wednesday. As the debate intensifies over whether the AI-related sell-off has been "overdone" and when pressured tech stocks will reach an inflection point, the performance and guidance of this semiconductor giant may have spillover effects on the entire tech supply chain.

So far this year, the S&P 500 Information Technology sector has fallen 3.5%, marking the worst start since 2022. There is a clear internal divide within the sector, with software companies suffering heavy losses due to concerns over AI disruption, while semiconductors and hardware continue to rise, reflecting a repricing of funds between the "AI beneficiaries" and the "AI impacted."

More importantly, the influence of tech stocks on the index remains irreplaceable. The tech sector accounts for about 33% of the S&P 500, significantly higher than the second-largest sector, financials, at 12.4%. Even if funds rotate into materials, energy, and other sectors, a substantial upward movement in the market still relies on the stabilization and recovery of the tech sector.

Software Stocks Hit Hard, Record Worst Start in History

There is a clear divergence within the tech sector, with the software industry being the hardest hit. The market is concerned that the new generation of AI tools will fundamentally disrupt the business models of software companies, leading to a 23% drop in the S&P 500 Software and Services Index year-to-date, marking the worst annual start for this index in history.

On an individual stock level, financial software company Intuit's stock has plummeted about 46% this year, with the company set to release its earnings report on Thursday; Salesforce's stock has declined 30% and will report earnings on the same day as Nvidia. Microsoft's year-to-date decline is nearly 20%.

According to data from S&P Dow Jones Indices, as of last Friday, Microsoft has become the largest single component stock dragging down the performance of the S&P 500 this year.

In addition to structural concerns in the software industry, Microsoft's stock is also weighed down by market doubts about whether its massive investments in AI infrastructure will yield sufficient returns. Similar capital expenditure concerns have also suppressed the stock performance of Amazon, Alphabet, and Meta Platforms, with Amazon's year-to-date decline around 10%.

Semiconductors and Hardware Strengthen Against the Trend

Not all sub-sectors of technology are retreating. The semiconductor and equipment sector has risen about 7% year-to-date, while the hardware sector has increased over 4%, contrasting sharply with the performance of the software sector. Currently, the relative performance gap between semiconductor stocks and software stocks has widened to extreme levels.

Behind this divergence is a widely circulated report that has triggered market anxiety. The report outlines the disruptive potential of AI and predicts that the unemployment rate will rise to 10.2% by 2028. This has intensified investors' pessimistic expectations regarding the situation of software companies while driving funds toward chip stocks seen as AI beneficiaries.

Last Tuesday, the software sector experienced a slight rebound, partly due to Anthropic announcing the launch of a new tool developed in collaboration with partner companies, briefly boosting market sentiment. However, analysts point out that whether this can become a substantial turning point for the sector remains to be seen

Technology Stocks Weigh Heavily, Dragging Down the Market

The dominant position of the technology sector in major U.S. stock indices is irreplaceable. The technology sector accounts for 33% of the S&P 500 index, while the second-ranked financial sector only accounts for 12.4%. Even if other sectors perform significantly better, if technology stocks continue to lag, the upward potential of the overall market will be constrained.

In fact, other sectors have indeed benefited from the rotation. Since the technology sector peaked at the end of October last year, it has cumulatively fallen by about 10%, while the materials and energy sectors have both risen by over 20%, and the industrial and consumer staples sectors have also seen gains of over 10%.

Thanks to the support from these sectors, the S&P 500 index has largely remained flat during the pressure on technology stocks.

Nvidia Earnings Report: Waiting for "AI Narrative" to be Repriced

Against this backdrop, the importance of Nvidia's earnings report released after the market on Wednesday has been further amplified.

Nvidia, along with Alphabet, Apple, and Tesla, forms the core driving force of this bull market since October 2022, as investors were attracted to these companies' extraordinary profit growth and competitive moats.

Now, as the AI narrative faces market skepticism, whether Nvidia's quarterly report can restore confidence may largely determine the next direction of the entire technology sector and even the broader market.

Nvidia is also the largest company by market capitalization among the Mag7. Chuck Carlson, CEO of Horizon Investment Services, stated that Nvidia's earnings report is important because it “is somewhat like a key pivot point for the Mag7.”