US technology stocks have experienced a sluggish start to 2026, becoming a major factor holding back broader market gains. NVIDIA's upcoming earnings report is widely viewed by the market as crucial for potentially reversing the negative sentiment. NVIDIA is scheduled to release its quarterly results after the US market closes on Wednesday. As debate intensifies over whether the AI-related sell-off has been overdone and when pressured tech stocks might find a turning point, the semiconductor giant's performance and guidance could have significant spillover effects across the entire technology industry chain. Year-to-date, the S&P 500 Information Technology sector has declined by 3.5%, marking its worst start to a year since 2022. A clear divergence is evident within the sector: software companies have been hit hard by fears of AI disruption, while semiconductors and hardware have maintained gains. This reflects a market reassessment, differentiating between companies perceived as beneficiaries of AI and those potentially threatened by it. Furthermore, the influence of technology stocks on major indices remains substantial and difficult to replace. The technology sector carries a weight of approximately 33% in the S&P 500, significantly higher than the 12.4% weight of the second-largest sector, financials. Even if sector rotation boosts areas like materials and energy, a substantial market rally would still depend on the technology sector stabilizing and recovering.

Software Stocks Hit Hard, Record Worst-Ever Start A pronounced divergence has emerged within the tech sector, with the software industry bearing the brunt of the sell-off. Market concerns that next-generation AI tools could fundamentally disrupt software companies' business models have led to a 23% plunge in the S&P 500 Software & Services Index since the start of the year, its worst annual opening on record. On an individual stock level, financial software provider Intuit has seen its shares plummet approximately 46% year-to-date; the company is set to report earnings on Thursday. Salesforce shares have declined 30%, with its report due Wednesday alongside NVIDIA's. Microsoft has fallen nearly 20% this year. According to S&P Dow Jones Indices data, as of last Friday, Microsoft has been the single largest detractor from the S&P 500's performance this year. Beyond structural worries affecting the software industry, Microsoft's stock has also been pressured by market skepticism over whether its massive AI infrastructure investments will yield sufficient returns. Similar concerns about capital expenditures have also weighed on the share prices of Amazon, Alphabet, and Meta Platforms, with Amazon down about 10% for the year.

Semiconductors and Hardware Buck the Trend Not all technology sub-sectors have retreated. The Semiconductors & Semiconductor Equipment sector has gained approximately 7% year-to-date, while the Hardware sector has risen over 4%, presenting a stark contrast to the software sector's performance. The performance gap between semiconductor stocks and software stocks has now widened to extreme levels. This divergence stems from market anxiety triggered by a widely circulated report. The report outlined a scenario of AI's disruptive potential, predicting the unemployment rate could climb to 10.2% by 2028. This has intensified investor pessimism towards software companies while driving capital towards chip stocks seen as beneficiaries of the AI trend. Last Tuesday, the software sector experienced a minor rebound, partly due to a brief sentiment boost after Anthropic announced new tools developed with partners. However, analysts note that it remains to be seen whether this can mark a substantive turning point for the sector.

Tech Sector's Heavy Weight Drags on Broader Market The technology sector's dominant position in major US stock indices is irreplaceable. With a weighting of 33% in the S&P 500, far exceeding the 12.4% weighting of the second-placed financials sector, the tech sector's performance is crucial. Even if other sectors significantly outperform, persistent weakness in tech stocks will limit the upside potential for the broader market. Indeed, other sectors have already benefited from this rotation. Since the technology sector peaked in late October last year and subsequently fell about 10%, the materials and energy sectors have both rallied over 20%, while industrials and consumer staples have gained more than 10%. It is largely due to the support from these sectors that the S&P 500 has managed to trade largely sideways overall during the period of tech stock weakness.

NVIDIA Earnings: Awaiting a Re-pricing of the "AI Narrative" Against this backdrop, the importance of NVIDIA's earnings report on Wednesday is magnified. NVIDIA, along with other mega-cap companies like Alphabet, Apple, and Tesla, formed the core drivers of the bull market that began in October 2022, a period when investors were drawn to these companies' exceptional profit growth and competitive moats. Now, as the AI narrative faces market skepticism, whether NVIDIA's quarterly report can restore confidence will significantly influence the next direction for the entire technology sector, and potentially the broader market. NVIDIA is also the largest company by market capitalization within the so-called "Mag 7." Chuck Carlson, CEO of Horizon Investment Services, stated that the importance of NVIDIA's earnings lies in it acting as a "key pivot point" for this influential group of stocks.