Why Internet Stocks Are Falling Behind Despite Market Gains

2026-10-12 economy

New York, Monday, 12 October 2026.
A sharp decline in pure-play internet stocks highlights growing investor concern over artificial intelligence disruption and heavy capital expenditure, contrasting sharply with broader stock market gains.

Internet Stocks Diverge from Broader Market Gains

Pure-play internet companies are experiencing a significant sell-off in 2026, even as the broader technology index advances. According to Evercore ISI, 19 large-cap internet stocks have declined by an average of 18% in 2026, while the S&P 500 gained 14% and the Nasdaq Composite rose 19% during the same period [1]. This divergence highlights growing skepticism among institutional investors regarding traditional web platform business models in an increasingly AI-dominated marketplace [1]. The performance gap represents a 32 = 32% divergence between the average internet stock and the broader market index [1]. Investors are citing six bear market factors, including stretched valuation exits from 2025 and AI disruption risks affecting companies like Booking Holdings Inc. and Expedia Group Inc. [1].

Capital Expenditure and Cash Flow Concerns

A major driver of the sector’s underperformance is the shift in capital expenditure intensity. U.S. public company capital spending reached $507.4 billion in Q2 2026, a 35.66% increase year-over-year, with technology capex rising 79.88% [4]. Aswath Damodaran, a professor at Stern School of Business, notes that hyperscalers like Alphabet and Meta are shifting from capital-light to asset-heavy models, necessitating higher cost-of-capital hurdles [4]. Despite high AI capital expenditures over the next 2 to 3 years, Evercore ISI disputes market skepticism regarding negative free cash flow for Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc. [1]. Analysts project positive free cash flow inflection points for these hyperscalers within 3 to 12 months, potentially serving as a catalyst for market revaluation [1].

Economic Divergence and Global Investment

The impact of AI investment is creating a distinct divide between the U.S. and other economies. As of 2026-10-10, the S&P 500 has gained roughly 13.5% year-to-date, adding approximately $9 trillion in market capitalization, largely driven by AI-related tech stocks [5]. Excluding AI-related companies, the U.S. old economy index gained only 5.5% since 2026-01-01, slightly trailing the European STOXX 600 index which gained roughly 5.6% [5]. In 2026, the U.S. and Canada accounted for roughly 60% of new global data center capacity additions, while Europe accounted for approximately 10% [5]. Global AI investments are projected to exceed $1 trillion in 2026 and reach approximately $1.4 trillion in 2027 according to Bank of America research [5].

Alternative Investment Strategies

Amidst the AI volatility, some investors are looking toward companies with less exposure to artificial intelligence infrastructure. Berkshire Hathaway’s four major operating units earned approximately $16.1 billion after tax in H1 2026, an 11% increase year-over-year [2]. Mastercard reported a 22% year-over-year increase in second-quarter 2026 earnings per share, relying on transaction fees rather than AI-specific infrastructure [2]. Dan Niles of Schwab Network questions how sustainable today’s elevated earnings and margins are for AI-related stocks driving the S&P 500’s headline performance [3]. Damodaran advises investors to consider strategies such as holding short-term Treasuries yielding >4% to mitigate risks associated with market exuberance [4].

Recent Market Volatility and Outlook

Market volatility persisted into early October 2026, with Nasdaq futures rising after AI stocks experienced their worst session since August. OpenAI disclosed to investors that its annualized revenue stood at $50 billion as of late September, contrasting with a $68 billion figure that had circulated the prior month [6]. Tech stocks rebounded on Friday as chip stocks gained and jitters over the AI trade subsided, with Bloomberg reporting AI developer OpenAI expects annualized revenue to reach or exceed $70 billion by the end of 2026 [7]. Vital Knowledge analyst Adam Crisafulli cautioned against expecting a quick recovery, noting that the sell-off reflected extreme positioning imbalances that have further to unwind [6].

Sources

Artificial Intelligence Internet Stocks