Why that $2 trillion software stock wipeout didn’t derail the AI bull market

S&P 500 futures rose 0.18% ahead of the open after the index closed up 0.47%, supported by broad Q4 earnings beats (75% of S&P companies reported, EPS up ~12% YoY and ~5% above pre-quarter consensus). Big tech ‘hyperscalers’ are materially ramping AI capex—Wells Fargo cites 2026 capex guidance up 24% (~$117bn), an estimated $1.3tn of AI-related buildout through 2027 with ~$660bn planned for this year—and are increasingly funding expansion with debt (Alphabet’s $20bn 100-year bond and $243bn tracked for data-center debt since 2025). The scale of spending is a near-term tailwind for data-center real estate, equipment and power providers even as software stocks have seen a deep drawdown (~-34%, ~ $2tn wiped off peak and S&P weight down from 12.0% to 8.4%), leaving markets in a cautiously bullish, risk-on posture.

Analysis

Market structure: Hyperscalers (GOOGL/GOOG, MSFT, AMZN) and their ecosystem (data‑center REITs like EQIX/DLR, GPU/semicap suppliers NVDA/ASML/LRCX, power utilities) are primary beneficiaries from a projected $660B–$1.3T capex cycle through 2027; pure‑play enterprise SaaS (the -34% drawdown cohort) are the immediate losers but remain protected by multi‑year contracts and high switching costs. Competitive dynamics favor scale — rising capex raises barriers to entry and concentrates pricing power in hyperscalers and GPU monopolists, while colo landlords capture sticky cash flows but face re‑negotiation pressure over time.

Risk assessment: Key tail risks are regulatory AI constraints, grid/permitting bottlenecks, a sharp repricing of corporate credit (IG/HY spreads +50–100bps), or a rapid GPU supply shock; these could materialize over 3–24 months. Immediate (days) upside is sentiment driven; short term (weeks–months) depends on bond issuance and equipment lead times; long term (12–36 months) the risk is overbuild and margin compression for colo and equipment makers. Hidden dependencies include NVIDIA GPU supply concentration, local utility capacity, and bank lending appetite (BAC/WFC/JPM underwriting), while catalysts are hyperscaler bond calendars and Fed moves.

Trade implications: Tactical long bias to hyperscalers and infra: consider 6–18 month long positions in GOOGL (2–3%) and EQIX/DLR (1.5–2%), plus 1–2% exposure to NVDA or ASML for semiconductor leverage; trim high‑multiple SaaS exposure by 25–40% and rotate into infra on any 3–7% pullback. Options: use 3–6 month call spreads on GOOGL (10–20% OTM) to limit premium, or buy protective puts sized to 0.5–1% of NAV. Pair trade: long EQIX / short IGV (software ETF) 1:1 to express structural rotation.

Contrarian angles: Markets may be overstating immediate AI substitution risk for enterprise software — expect some mean reversion in beaten down SaaS names if guidance holds; conversely, the bullish case may underprice energy and permitting constraints that could compress colo FFOs. Historical parallels: telecom/infra build cycles produced winners via consolidation after an overbuild; here patience and selection matter. Monitor triggers: IG spread widening >50bps, GPU price moves >25%, or data‑center vacancy shifts >200bps to re‑rate positions.

Key Decisions for Investors

• Establish a 2–3% long position in Alphabet (GOOGL/GOOG) with a 6–12 month horizon; scale in on up to two tranches (1/2 at market, 1/2 on a 3–5% pullback); hedge tail risk by buying a 6‑month 10% OTM put sized to 0.5% NAV or sell covered calls to fund cost if seeking income.
• Allocate 1.5–2% to data‑center REITs (EQIX or DLR) for 12–24 months to capture hyperscaler tenancy growth; enter on any 3–7% pullback, set a stop if FFO guidance is cut >10% or data‑center vacancy rises >200bps.
• Trim high‑multiple SaaS exposure by 25–40% (either specific names or ETF IGV) and reallocate proceeds to infra (GOOGL, EQIX) — execute if a name is down >20% from peak or shows <5% operating margin improvement in next two quarters.
• Implement a pair trade: Long EQIX (1% NAV) / Short IGV (1% NAV) for 6–12 months to express software→infra rotation; rebalance or close if the spread tightens to within 5% or if EQIX underperforms IGV by >15% relative.
• Monitor specific triggers for tactical adjustments: increase bank exposure (BAC, WFC, JPM) by 1–2% if hyperscaler direct debt issuance exceeds $40B in a 30‑day window or IG spreads widen >50bps; reduce semiconductor/equipment longs if GPU spot prices fall >25% within 60 days.