Why ’Net Stocks’ are down sharply this year despite Nasdaq’s gains

Investors have recently flocked to internet equities, viewing them as attractive entry points, despite a sharp selloff throughout the year. The 19 large-cap internet stocks tracked by Evercore ISI have dropped by an average of 18% in 2026, trailing broader market benchmarks significantly, while the S&P 500 has risen 14% and the Nasdaq Composite gained 19%. Research from Evercore ISI identifies six key bear market factors contributing to the sector's underperformance:

1. Valuation Exits: Expectations of stretched valuations following a three-year bull run for internet stocks in 2025.

2. AI Disruption Risks: Uncertainty around artificial intelligence's potential impact, with notable names like Booking Holdings Inc., Expedia Group Inc., Shopify Inc., and Uber Technologies Inc. affected.

3. Capex Intensity: The escalating capital expenditures of major hyperscalers as a percentage of revenue are expected to continue increasing in fiscal 2027 and possibly 2028.

4. Middle East Energy Shock: Inflationary pressures stemming from the ongoing Iran conflict have escalated costs and suppressed consumer demand in the cyclical sector.

5. IPO Supply Expectations: Investors are reallocating capital to accommodate the upcoming generation of mega-cap internet public offerings.

6. Investor Confidence: Wall Street's consensus remains overly pessimistic regarding the potential negative free cash flow (FCF) for major AI-focused companies like Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc. over the next two to three years.

Despite these concerns, Evercore ISI maintains that the market may be overly pessimistic, as upward revisions to revenue and operating income could potentially offset the spending increases. The research firm anticipates that upward estimates revisions for revenue and operating income for hyperscalers could serve as a major catalyst to correct market wrongs, particularly as there is a possibility of positive free cash flow inflection points within the next 3 to 12 months.