Microsoft Loses $400B and Drags Software Stocks Into Bear Market

I won't sugarcoat it: what happened on January 29, 2026 is the moment Wall Street stopped buying promises about artificial intelligence and started demanding receipts. Microsoft reported record revenue of $81.3 billion, beat every analyst estimate, and still lost between $357 billion and $440 billion in market cap in a single day. The biggest drop since March 2020.

And it didn't stop there. ServiceNow plunged 11%, SAP lost 17%, Salesforce dropped 6%, and the IGV software ETF officially entered bear market territory, down 22% from its highs. In total, the software sector lost over $500 billion in a single trading session.

After more than 10 years covering digital transformation in enterprises, my verdict is clear: this isn't a market glitch. It's a narrative shift that affects every company running on cloud software. Here's what happened, why it matters, and what you should do about it.

The Numbers That Spooked Wall Street

Let's look at Microsoft's Q2 FY2026 results (reported January 28):

If you ask me directly, any CEO on the planet would sign for these numbers without hesitation. Record revenue, solid margins, double-digit growth across every segment. So why did the stock tank?

The answer lives in one line: $37.5 billion in capital expenditure in a single quarter. That's 66% more than the same period last year. In the first half of the fiscal year, Microsoft has already spent $72.4 billion, projecting an annualized run-rate of nearly $150 billion.

Where's the money going? Data centers, Nvidia chips, AI infrastructure. Microsoft plans to increase its AI capacity by 80% in FY2026 and nearly double its datacenter footprint over two years.

Goldman Sachs put it bluntly: capex came in 9% above Wall Street expectations without a proportional acceleration in Azure growth. It's the third consecutive quarter where Microsoft has outspent expectations without cloud revenue keeping pace.

The OpenAI Problem: $281B of Concentrated Risk

Here's a data point most outlets buried that, in my opinion, is the most concerning figure in the entire report. Microsoft's remaining performance obligations (RPO) hit $625 billion, a 110% increase. Sounds spectacular until you read the fine print.

45% of that backlog is tied to OpenAI. That's approximately $281 billion dependent on a single company that still requires massive external capital infusions to operate. The remaining 55% grew 28% organically — a solid number, but one overshadowed by the concentration risk.

As Keith Weiss from Morgan Stanley put it: "One of the core issues weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected."

Satya Nadella tried to calm the waters: "You've got to think about compute as also R&D." But Wall Street doesn't buy qualitative arguments when it sees $37.5 billion going out the door every three months.

The Contagion Effect: Software Gets Demolished

What started with Microsoft turned into a sector-wide selloff. Here's the damage from January 29:

The iShares Expanded Tech-Software ETF (IGV) dropped 5.4% in a single day, its worst session since April 2025. With a cumulative 22% decline from highs, the software sector has officially entered bear market territory. January 2026 is on track to be the worst month for software since October 2008, when IGV lost 23%.

The most brutal stat: ServiceNow has lost nearly 50% from its 52-week high. Salesforce is down 40%. Adobe is down 35%.

The Paradox Nobody Expected

Here's what strikes me most: these companies aren't reporting bad numbers. Microsoft beat estimates. ServiceNow beat estimates. And yet the stocks cratered.

Morgan Stanley described ServiceNow's results as "Good, but not good enough." In a climate of heightened skepticism, meeting expectations is no longer enough. The market demands concrete proof of AI return on investment, not promises of future growth.

Meanwhile, semiconductors are rising. The Philadelphia SE Semiconductor Index gained ground in January. Investors are rotating out of software and into chips: they see Nvidia as the AI winner and software companies as the ones footing the bill with no guaranteed payoff.

The exception was Meta, which rallied after earnings and added $176 billion in market cap. The difference? Meta could demonstrate that its AI investment is already generating real ad revenue. The market isn't against AI spending; it's against AI spending with no demonstrable returns.

$600 Billion in Capex: The Biggest Bet in History

To grasp the magnitude of what's happening, look at how much tech giants plan to spend on AI infrastructure in 2026:

$600 billion. For perspective, that's more than the GDP of Argentina, Sweden, or Norway.

According to Bain & Company, the industry will need to generate $2 trillion in annual revenue in the coming years just to justify this spending. Bank of America estimates AI capex will consume up to 94% of operating cash flows for these companies in 2026.

AI spending currently equals 0.8% of US GDP. Previous tech investment cycles peaked at 1.5% of GDP or more, suggesting the bubble could inflate further before any serious correction.

Dot-Com Bubble 2.0? What the Insiders Are Saying

The comparison to the 2000 dot-com bubble is inevitable. And the experts are split.

Bret Taylor, OpenAI Chairman, said it plainly at Davos (January 22, 2026): "I think we're probably in a bubble. I think over the next few years, you'll see a correction, you also see consolidation, but I don't think you can get innovation without that kind of messy competition."

Sam Altman, OpenAI CEO, was equally direct: "Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes."

David Solomon, Goldman Sachs CEO, expects "a lot of capital that was deployed that doesn't deliver returns."

Michael Hartnett from Bank of America notes that historically, equity bubbles last about 2.5 years with 244% trough-to-peak gains. The AI rally is in year 3, with the S&P 500 up 79% and the Nasdaq 100 up 130% since the end of 2022.

But there's a key difference from 2000: during the dot-com bubble, companies like Pets.com had zero revenue. Today, Microsoft, Nvidia, and Meta are the most profitable companies in history. This suggests a selective 20-30% correction in valuations, not a systemic collapse. Companies with demonstrable returns will survive. AI wrappers with no business model of their own won't. As we analyzed with the ChatGPT advertising controversy, the pressure to monetize AI is forcing increasingly aggressive decisions.

What This Means for Your Business: Microsoft 365 Price Hikes

While Wall Street debates bubbles, the real impact is already hitting IT budgets. Microsoft announced price increases for Microsoft 365 starting July 1, 2026:

But it's not just the price hike. Since November 2025, Microsoft eliminated automatic volume-based discounts for Enterprise Agreement customers. Everyone now pays list price regardless of size. Combined with the July increase, a large enterprise could see a total cost increase of 20-25% on their Microsoft bill.

Microsoft justifies the increase with 1,100 new features added, including Copilot Chat, Defender for Office 365 Plan 1, and Intune capabilities. The problem: many businesses didn't ask for these features and can't opt out of paying for them.

If your business relies heavily on Microsoft 365, now is the time to audit unused licenses, evaluate alternatives like the CRM tools we've analyzed, and negotiate before July.

Unexpected Winners: M&A Opportunities

Not everything is doom and gloom. The crash has created what Orlando Bravo, founder of Thoma Bravo (one of the largest private equity firms), calls "incredible buying opportunities right now."

According to Morningstar valuations, several companies are trading well below intrinsic value:

• Adobe: 40% undervalued
• Salesforce: 28% undervalued
• ServiceNow: 23% undervalued

CNBC reports the selloff is "setting the stage for a flurry of acquisitions" in the software sector. Companies with strong balance sheets and established products are now attractive targets for investment firms. If you ask me directly, 2026 will be the biggest year for software M&A since 2019.

The Real Risk: The Narrative Has Shifted

During 2024 and 2025, simply mentioning "AI" in an earnings call was enough to send shares higher. That was the "AI Discovery" era: narrative alone justified premium valuations.

2026 is the "AI Utility" era: the market demands proof, not promises. And that changes the rules for the entire ecosystem:

• For Big Tech: every dollar of capex must be justified with real revenue
• For SaaS companies: the threat of AI agents replacing subscription software is real
• For enterprise users: prices are going up because someone has to pay for that $600 billion in infrastructure
• For employees: margin pressure will translate into more layoffs like those we've seen at Amazon and Pinterest

As Nicolas David of Oddo BHF stated, the decline reflects "overall distrust of the market regarding software names." This isn't a bad quarter. It's a structural shift in how Wall Street values the technology sector.

What To Do Now: 5 Concrete Actions

My verdict is clear: this isn't a passing crisis, it's a new reality. Here are my recommendations:

1. Audit your software licenses. Review how many Microsoft 365, Salesforce, and other SaaS licenses you're paying for versus how many are actually used. Most companies have 15% to 30% of underutilized licenses.

2. Diversify vendors. Don't put all your eggs in one basket. Evaluate Google Workspace as an alternative to Microsoft 365, especially for basic plans where the percentage increase is steepest.

3. Negotiate before July. If your Microsoft 365 renewal falls after July 1, try to move it up. Microsoft's sales teams have more flexibility than they let on, especially now that there's pressure to demonstrate customer retention.

4. Watch M&A opportunities. If you work with publicly traded SaaS companies that are undervalued, prepare for potential ownership changes. This could mean shifts in product, pricing, or support.

5. Adopt AI where ROI is demonstrable. The Meta vs Microsoft lesson is clear: AI that generates measurable revenue gets rewarded. Experimental AI with no clear metrics gets punished. Apply the same standard to your business.

Frequently Asked Questions

Is this the start of a dot-com-style crisis?

Not exactly. Today's companies have real revenue and solid margins, unlike the dot-coms of 2000. Experts point to a selective 20-30% correction in valuations, not a systemic collapse. Companies that prove real returns from their AI investments will survive. Those living off narrative without results won't.

Why did shares fall if Microsoft reported record revenue?

Because the market stopped valuing past growth and started questioning future spending. The $37.5 billion in quarterly capex (+66% YoY) without proportional Azure acceleration scared investors. Additionally, 45% of Microsoft's backlog depends on OpenAI, representing significant concentration risk.

How much will Microsoft 365 prices increase?

Between 5% and 33% depending on the plan, starting July 1, 2026. Frontline plans (F1) increase 33%, basic plans between 12% and 17%, and Enterprise between 5% and 13%. Combined with the removal of volume discounts, total impact could reach 20-25% for large enterprises.

Which software companies are most affected?

ServiceNow has lost nearly 50% from its highs, Salesforce 40%, and Adobe 35%. However, Morningstar analysts consider these same companies significantly undervalued, suggesting buying opportunities for long-term investors.

Is this a good time to invest in software?

According to Orlando Bravo (Thoma Bravo), there are "incredible buying opportunities right now." Morningstar sees Adobe as 40% undervalued and Salesforce as 28% undervalued. But volatility will likely continue as the market digests the $600 billion annual AI spending. This is not financial advice, but the fundamentals of many companies are stronger than their current stock prices suggest.