Billions Flow Out of the Technology Sector
Rising AI costs and high valuations are putting tech companies under pressure. XLK saw $8.7bn in outflows.
Technology stocks are falling sharply, even though demand for artificial intelligence solutions remains strong. The issue is not a lack of interest in AI, but rising costs, high valuations and uncertainty over when massive investments will begin to generate the expected returns.
Over the past month, the Technology Select Sector SPDR Fund (XLK) recorded net outflows of $8.7 billion. This was the largest outflow among sector ETFs tracking companies from the S&P 500. During the same period, XLK fell by 5.4%, making it the worst-performing fund in the group, according to The Kobeissi Letter.
XLK includes hardware manufacturers, semiconductor companies, software developers and IT service providers. The capital outflow therefore reflects broader caution towards the technology industry rather than problems affecting only a handful of companies.
One of the main concerns is the amount being spent on artificial intelligence. The largest technology companies planned to invest around $600 billion in AI in 2026. Investors are now looking more closely at whether such enormous spending is translating into higher revenue and profits. Companies that fail to meet elevated expectations are being punished severely.
Software companies are feeling the pressure particularly strongly. Businesses are shifting some of their budgets away from applications and services and towards data centres, servers, chips and network infrastructure. IBM admitted that it had failed to keep pace with this shift. Following a weaker revenue forecast, the company’s shares fell by 25%, while the sell-off also spread to other software stocks.
Meanwhile, capital is moving into other industries. The Financial Select Sector SPDR Fund (XLF) attracted net inflows of $2.1 billion. The Energy Select Sector SPDR Fund (XLE) recorded outflows of $1 billion, while the Communication Services Select Sector SPDR Fund (XLC) lost $500 million.
The technology sector’s future performance will depend on whether companies can demonstrate tangible returns from their AI investments. For now, the market is clearly distinguishing between businesses that can turn heavy spending into stronger financial results and those that continue to fall short of investors’ expectations.
