AI-driven semiconductor strength contrasts with enterprise software weakness, shaping Q1 2026 market rotations amid stagflation fears.
Datadog (DDOG) outperformed broader tech stocks in Q1 2026 as AI infrastructure demand buoyed semiconductor firms, offsetting declines in enterprise software. The S&P 500 and Russell 1000 Growth index fell 4.33% and 9.78%, respectively, amid stagflation concerns and delayed Fed rate cuts.
Investor sentiment shifted toward AI-linked stocks, benefiting chipmakers while pressuring software companies perceived as vulnerable to disruption. Rising energy prices and weaker economic data fueled volatility, reversing early-year gains.
Despite the sell-off, fund managers maintained confidence in long-term valuations, citing AI trends as a key driver for future growth.