The technology sector's turbulent first quarter of 2026, which saw the Nasdaq Composite fall 7% and software stocks plunge 30%, was primarily a repricing event rather than a reflection of deteriorating corporate fundamentals, according to Matthew Bartolini, Global Head of Research Strategists at State Street Investment Management.
In an interview, Bartolini emphasized that the selloff was driven by two interconnected forces: heightened geopolitical uncertainty and a resurgence of inflation concerns. These factors, he argued, worked through similar but distinct transmission mechanisms to depress technology stock prices.
“On the geopolitical front, heightened macro uncertainty widened risk premiums across asset classes, including growth-sensitive technology stocks,” Bartolini said. “With greater uncertainty around future economic and fundamental growth drivers, investors demanded higher compensation for risk, which translated into lower asset prices as capital rotated toward the liquidity and perceived safety of cash.”
Simultaneously, inflation fears resurfaced, complicating the monetary policy outlook. “As inflation risks re-emerged, expectations shifted toward the Federal Reserve potentially delaying rate cuts, pushing interest rates higher across the yield curve,” Bartolini explained. “This raised the discount rate applied in present-value calculations of future cash flows.” For growth-heavy sectors like technology, which can be viewed as longer-duration equities, higher discount rates have an outsized impact on valuations.
Bartolini stressed that the selloff should not be interpreted as a sign of underlying business weakness. “Importantly, this was not a fundamentals-driven selloff, but rather a re-rating and de-risking event,” he said. This distinction is critical as investors weigh the long-term promise of artificial intelligence against near-term volatility driven by heavy capital expenditure.
“AI-growth monetization is in the early stages, but the CapEx fueling that potential growth is much further along,” Bartolini noted. “So, a lot of cash is going to support the build out, with not the equal or greater cash flow being generated by that spend. That can create near-term volatility as the actual growth production and productivity efficiency is uncertain.”
To help advisors navigate the noise, Bartolini highlighted three key indicators: hyperscaler capital expenditure plans, earnings trends across the AI ecosystem, and the ability of large firms to fund investments internally. He pointed out that continued increases in hyperscaler CapEx signal that these firms view AI as a critical growth engine. Strong growth among suppliers to the AI build-out, such as semiconductors and cloud infrastructure, indicates the ecosystem is already monetizing AI. Balance sheet strength also matters; recent debt issuance remains modest relative to balance-sheet strength.
The rise of AI is also reshaping competitive dynamics within the technology sector, leading to unusually high dispersion in returns. “Return dispersion across the 11 Technology sub industries has surged to extreme levels, reaching well above the 90th percentile historically,” Bartolini said. Such conditions have occurred only during the COVID-19 pandemic, the Great Financial Crisis, and the dot-com bubble—periods that historically coincided with broad market meltdowns. Yet today, the broader market remains resilient, making this level of dispersion extremely unusual.
For advisors, the key takeaway is that the selloff was a valuation adjustment, not a signal to abandon tech. As Bartolini noted, the underlying growth drivers—particularly in AI—remain intact, even if the path to monetization is uncertain. The State Street's Doshi: Oil Spike Poses Short-Term Gold Headwind piece offers additional context on how geopolitical factors are influencing asset prices. Meanwhile, the Anthropic Unveils 10 AI Agent Templates for Financial Services story underscores the ongoing investment in AI infrastructure.
