Software Short Sellers Mint $24 Billion Profit as Stocks Tumble

Microsoft’s stock fell 10% in one day, causing a $381 billion market value drop. This occurred after the company’s cloud business failed to meet high expectations, despite strong quarterly results. The selloff reflected broader market concerns about the costs of AI investments.

Software short sellers are capitalizing on the recent downturn, generating $24 billion in profit as tech stocks continue to fall. The tech sector is under pressure as investors question the ROI on AI-driven capital spending. The selloff highlights a growing skepticism about the ability of tech companies to justify valuations with actual growth.

Microsoft’s Azure business grew 38% in constant currency, but this fell short of the 39.4% whisper number, shaking the market. The company’s capital spending increased to $37.5 billion, signaling a large bet on AI infrastructure.

Why Did This Happen?

Microsoft 365 Copilot has only 15 million paid users out of 450 million seats, raising concerns about its monetization potential. The company’s outlook for the upcoming quarter was below analyst expectations, particularly in its Windows and Devices business.

The market is increasingly focused on the ability to monetize AI investments, with Microsoft’s recent selloff serving as a cautionary tale. The company’s RPO is heavily tied to OpenAI, a customer that still burns cash and lacks a sustainable business model.

How Did Markets React?

The Nasdaq was sharply lower, falling 1.5% as Microsoft’s shares declined more than 11%. Bitcoin also tumbled to a 2026 low of $85,200 as risk-off sentiment took hold. The broader market is reacting to a combination of tech sector weakness and macroeconomic uncertainty.

The S&P 500, which had briefly topped 7,000 earlier in the week, retreated slightly but still holds a positive year-to-date return. February is historically a challenging month for the S&P 500, with 35 lower closes out of 76.

Investor sentiment has shifted toward defensive positions, with tech stocks losing favor compared to cyclical sectors like materials and industrials. The selloff in tech is being driven by fears that AI spending may not translate into returns.

What Are Analysts Watching Next?

Upcoming earnings from Alphabet and Amazon will be closely watched for signs of growth that justify their high valuations. The tech sector faces a high bar, with expectations for extraordinary returns on massive AI investments.

The Federal Reserve’s next moves will also be key, as the central bank paused its rate-cutting cycle due to signs of labor market stabilization. A strong jobs report on February 6 could further impact market sentiment.

Microsoft is being positioned as a potential buying opportunity by some analysts, despite the recent selloff. The company is seen as a leader in AI development, with some investors viewing the decline as a chance to enter at a discount.

Investors are advised to remain cautious as expectations for tech companies have become very high. Even strong results may not be enough to satisfy market demands, particularly if growth is below forecasts.

The Magnificent Seven index, which includes Microsoft, is down 1.5% since hitting a record three months ago. This decline contrasts with the S&P 500, which has gained 0.7% in the same period.

The ability of tech companies to show that their AI investments are translating into returns will be crucial for investor confidence. Until there is clear evidence of this, the sector is likely to remain under pressure.

Outlook for 2026

The year is expected to be an inflection point for Microsoft as it continues to invest in AI and cloud infrastructure. The company’s ability to grow its AI business will be a key factor in determining its long-term success.

The market is also closely watching how other tech giants like Amazon and Alphabet manage their AI investments. These companies are expected to spend over $500 billion combined on capital expenses this year, according to Bloomberg.

Investors are advised to monitor both earnings performance and macroeconomic indicators as they assess the outlook for tech stocks in 2026. The coming weeks will be critical in determining whether the sector can regain its momentum.

The tech sector is at a crossroads, with high valuations requiring strong growth to justify current levels. Until there is clear evidence of this, the selloff is likely to continue.

Investors are advised to remain cautious as they navigate the current market environment. The focus will be on how companies can demonstrate that their AI investments are delivering value.