Man Group: AI Creates Divide Within Technology Sector

Investment firm Man Group forecasts that the divergence created by artificial intelligence (AI) within the technology sector will persist through the second half of 2026. The firm is closely observing the rapid growth in the semiconductor industry alongside the challenges faced by software companies.

The AI boom has significantly driven up the valuations of semiconductor firms, while simultaneously pressuring the software sector. Man Group suggests this trend will continue until the commercial returns from AI investments become clearer. Major tech companies such as Microsoft, Amazon, Meta, and Google appear to be approaching a inflection point regarding free cash flow, as AI-related capital expenditures are now consuming over 90% of their operating cash flows.

Man Group's analysis indicates that the free cash flow of hyperscalers is likely to decrease significantly before beginning to recover. Oracle is expected to report negative free cash flow for several consecutive years. Overall, the anticipation surrounding AI has pushed semiconductor valuations to near perfection, leaving little room for error. Upcoming AI IPOs may offer further clarity on the sustainability of AI initiatives.

Global equity markets have largely remained strong despite geopolitical tensions and rising interest rates. AI expectations have been a significant driver, but their sector-specific impacts have been unevenly distributed. Man Group notes that software sector valuations have retreated from their 2021 peak but remain substantially above historical norms, suggesting possible continued valuation compression unless clear signs of a growth recovery emerge.