What went wrong?
Looking at the first quarter of 2026 month by month, January was actually a positive month for the average MAG7 stock (up 1.5%). February was only slightly negative (down 0.9%).
The vast majority of the decline came in March, following U.S. military strikes on Iran, which commenced on February 28.
Technology businesses tend to be less directly connected to oil markets, so why the sharp underperformance? In our view, there were two main factors that affected the group as a whole.
First, these are among the largest and most liquid stocks in the index.
If investors want to pull capital from the stock market—or rotate into more defensive areas of the market, including energy—large-cap tech names will inevitably be sold.
Second, rising interest rates.
One of the main impacts of the conflict in Iran was the way it altered the outlook for monetary policy. The Fed signaled in March that it was now less likely cut rates in the immediate future, given potential inflation pressure from higher oil prices.
As we saw back in 2022, the last time the MAG7 substantially underperformed, tech/growth stocks are particularly susceptible to rising interest rates.
These are stocks whose valuations are pinned to long-term expectations of cash flow growth. This makes them more sensitive to relative changes in long-term rates (similar to how long-term bonds behave).
While risk-off sentiment and rising rates affected the group broadly, it does not explain all of the weakness. There were a number of important company-specific factors at play as well.
The software nosedive
As noted, MSFT was the worst performer this quarter. MSFT’s fourth quarter earnings results were reasonably strong, although some investors were underwhelmed with growth in the cloud segment.
The bigger story, though, was MSFT’s involvement in the controversy around software stocks. As we discussed in early February (Software as a Sell-Off), subscription-based software companies have become increasingly viewed as potential victims of AI innovation.
The concern is that AI agents, sometimes referred to as “claws,” will be able to perform many of the same functions that software companies now provide—at a fraction of the cost. And these agentic systems are only getting better.
The majority of MSFT’s operating income still comes from software, such as the Windows operating system and the Office suite of applications.
Like essentially all the MAG7 names, MSFT is gradually transforming itself into an AI infrastructure company, with aggressive investments in data centers. Yet it remains the only true software stock in the group—and was punished accordingly.
MSFT’s trajectory this quarter overlapped almost perfectly with the iShares Software ETF (IGV). MSFT is itself one of the largest holdings in that sector fund, with an approximately 8% allocation.
