a16z’s State of Markets II finds tech powering S&P 500 earnings as AI spending shifts to hardware

Andreessen Horowitz has published its latest read on public and private markets. The central finding: tech is still carrying the S&P 500, but where that money flows has changed.

The report, titled State of Markets II, was released on September 30, 2026, by a16z General Partner David George. Its headline theme is a rotation inside tech itself, away from software, which the firm calls “bits,” and toward hardware, or “atoms.” The engine behind that shift is demand for AI infrastructure.

The numbers behind the rotation

The report pulls together more than 100 charts covering public and private equity. A few figures stand out.

First, tech’s share of the market’s profit story. By a16z’s count, technology accounted for approximately 76% of S&P 500 earnings growth in 2026 as of late August.

Second, the spending. Capital expenditures from the major hyperscalers, namely Alphabet, Amazon, Meta, and Microsoft, reached an estimated $780 billion in 2026. That compares with $416 billion in 2025.

Third, the forecast. Expectations call for hyperscaler capex to potentially exceed $1 trillion annually starting in 2027.

Software grows up, and slows down

About 75% of public software companies are now profitable, according to a16z. Meanwhile, only about 30% are still growing faster than 20% a year.

This matters because investor appetite has historically rewarded software firms for rapid expansion. A profitable but slower-growing cohort changes the valuation conversation, pushing it toward cash flow and efficiency rather than blistering top-line gains.

What this means

For investors, the most direct implication is concentration. When a single sector drives approximately 76% of index earnings growth, broad market performance becomes heavily tied to that sector’s fortunes.

For semiconductor and hardware suppliers, the report paints a potentially favorable picture. Hyperscaler budgets jumping from $416 billion to an estimated $780 billion represent a large and growing pool of demand, and forecasts of more than $1 trillion a year from 2027 suggest that pool could keep expanding.

The flip side is dependence. Much of that demand comes from a small group of buyers. If Alphabet, Amazon, Meta, or Microsoft were to slow their spending, the ripple effects on their suppliers could be significant.

For software companies, with about 75% already profitable, the sector has proven it can run efficiently. The challenge is reigniting growth when only about 30% are expanding at more than 20% annually.

What to watch next: whether hyperscaler spending actually crosses the $1 trillion mark in 2027 as expected, and whether tech’s outsized share of S&P 500 earnings growth holds through the rest of 2026.