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The recent software selloff marks a dramatic shift in the AI narrative. A few months ago, the market debated whether AI was real. Today, it’s seen as an active threat to business models. We believe the hunt to sort the winners and losers reinforces AI’s massive buildout – and the borrowing spree by to finance it. The corporate micro spending has a macro impact, as increased leverage amplifies any upward pressure on interest rates. We like U.S. equities and credit, but get selective.
The market has been laser-focused on identifying companies exposed to AI disruption – and sorting out which ones it thinks will be able to evolve and adapt. The phenomenon is rippling through industry sectors, but software has been ground zero.
New AI agents can take on software-linked tasks, for example, potentially eroding the competitive moat some software companies have enjoyed for decades. The change in the AI narrative has triggered indiscriminate selling of these firms, resulting in a marked performance divergence within tech sectors.
Software providers have underperformed sharply in the past six months, as the chart’s red line shows. By contrast, sectors essential to the AI buildout – such as semiconductors and hardware – have advanced.
Indeed, we are still firmly in the AI buildout phase. The mega-cap tech companies are spending heavily on chips, data centers, and power infrastructure. This is a key reason why we still like infrastructure. What has changed is the market’s focus: It now asks how AI adoption will translate into revenues and profits. This sorting of winners and losers means it’s prime time for active investing, as we emphasized in our 2026 Global Outlook.
The broad software selloff shows how markets can miss nuances in the near term. Case in point: Software companies with proprietary data, mission-critical workflows, or strong customer relationships can leverage AI disruption and thrive, we believe. It’s key to apply such a granular lens beyond public markets. Software makes up a sizeable portion of many private equity funds, so AI disruption could be existential for some portfolio companies. Private credit is likely more shielded, in our view, as much of its software exposure is in short-term and senior-secured debt.
As the sorting process accelerates, the AI builders are locking in long-term financing to fund capex. Alphabet recently raised $20 billion in the U.S. investment-grade market and is reportedly preparing a 100-year sterling bond. The issuance bonanza reflects our Outlook’s leveraging-up theme: Investment is occurring now, and revenues will follow later, with credit bridging the gap. The problem: Rising corporate borrowing adds supply to bond markets struggling to digest large public deficits. The AI mega force is so powerful that it drives the macro environment, compounding any upward pressure on interest rates.
Such pressures simmered in the recent U.S. jobs report, which showed wage growth consistent with inflation settling above the Federal Reserve’s 2% target. The pressure could abate if AI productivity gains can break U.S. growth out of its longstanding 2% trend. We see a credible path for that to happen someday, but recent U.S. jobs data do not yet show that sectors exposed to AI are cutting hiring. We stay underweight long-term U.S. Treasuries as a result, and we’re selective in credit. The AI builders have largely tapped the U.S. investment grade market, so we prefer high-yield and European bonds.
We’re still in the AI buildout – but markets are now focused on a search for losers in the AI adoption phase. We favor U.S. equities, with selectivity crucial as dispersion widens. We prefer selected credit over long U.S. Treasuries.
Wei Li, Managing Director, is the Global Chief Investment Strategist at BlackRock Investment Institute at BlackRock Inc.
Jean Boivin, Head – BlackRock Investment Institute, Nicholas Fawcett, Senior Economist – BlackRock Investment Institute, Natalie Gill, Portfolio Strategist – BlackRock Investment Institute, contributed to this article.
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2026 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared February 17, 2026, on the BlackRock website. Used with permission.
Image: iStock.com/Rost-9D
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