Technology Sector Review – November 2026

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Key Takeaways Since Our Last Review

Small-cap technology lost less than mega-cap technology, but still lost ground. The Russell 2000, the small-cap proxy, fell 2.7% to 2,754.11, while the S&P 500 dropped 5.7% to 7,376.86 and the Nasdaq Composite slid 10.9% to 24,579.42. Small caps beat the Nasdaq by roughly eight percentage points, yet that edge came from mega-cap weakness rather than small-cap strength. 

Leadership broadened by default, not by conviction. The defining day was November 5, when the Nasdaq Composite fell 5.5% into correction territory, the Nasdaq 100 dropped 6.4% and erased about $2.5 trillion in market value, and the Philadelphia Semiconductor Index fell 12%. Investors feared a Democratic Congress, won in the November 3rd midterms, could slow data center construction. Profitable, free-cash-flow-positive small caps held up better than capital-hungry AI infrastructure stories. 

Last month we framed the October 27th to 28th Fed meeting as a choice between a hold and a second hike. The Fed held. Our call that leadership would narrow toward mega-cap balance sheets reversed: the largest platforms led the decline. Among companies named last month, NVIDIA Corporation (NASDAQ: NVDA) fell 9% on November 5. Applied Digital Corporation (NASDAQ: APLD) reported fiscal first-quarter revenue up 322% to $341.9 million, yet its shares fell more than 14% in the same selloff. Aehr Test Systems (NASDAQ: AEHR) raised its fiscal 2027 outlook to $150 million, while Sezzle Inc. (NASDAQ: SEZL) and FormFactor, Inc. (NASDAQ: FORM) both posted record quarters. 

Macro and Monetary Context

The Fed’s October 28 hold mattered for the stocks in this review. The Federal Open Market Committee kept the federal funds target range at 3.75% to 4.00%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack voting to hike. Many small-cap tech firms are valued on profits years away and carry floating-rate debt, so higher rates cut their valuations and raise their interest bills. 

Inflation reaches tech vendors through their customers. Consumer prices rose 3.7% in the year to September, with gasoline up 34.2%, leaving small and mid-sized businesses less to spend on software and hardware. The 10-year Treasury yield slid from 5.24% on October 9 to below 4.84% on November 5, easing financing for debt-funded data center builders and for small caps planning stock sales, unless a December hike reverses it.

Small-Cap Earnings and Fundamentals

Results separated cash generators from capital consumers. FormFactor, Inc. (NASDAQ: FORM), a semiconductor test supplier, posted record third-quarter revenue of $280.5 million, up 38.4% year-over-year; GAAP net income reached $73.8 million, and free cash flow climbed to $64.8 million from $19.7 million a year earlier, although fourth-quarter guidance of $285 million implies modest sequential growth. Aehr Test Systems (NASDAQ: AEHR) raised its fiscal 2027 outlook to $150 million, while Sezzle Inc. (NASDAQ: SEZL) posted a record quarter.

Sezzle showed operating leverage in a recurring model. Active subscribers rose 68.1% to 955,000, revenue growth outpaced transaction volume growth by 7.7 points, and net income rose 79.3% to $47.8 million. It raised 2026 guidance a fourth time and set preliminary 2027 adjusted earnings of $7.20 per share, the kind of recurring growth this review favors. 

Applied Digital is the counterexample on cash. About 1.41 gigawatts of critical IT load is leased across five campuses, supporting roughly $36 billion of contracted base-term revenue, but the company reported a GAAP net loss from continuing operations of $221.0 million and carries about $6.4 billion of debt. Signed leases test AI revenue credibility; balance sheets test resilience. 

Big Tech Signals for Small Caps

Hyperscaler demand accelerated. Google Cloud revenue rose 103% to $30.7 billion at Alphabet Inc. (NASDAQ: GOOGL), Azure grew 48% to $33.2 billion at Microsoft Corporation (NASDAQ: MSFT), and AWS grew 39% to $46 billion at Amazon.com, Inc. (NASDAQ: AMZN). Spending rose faster. Alphabet’s quarterly capital expenditures reached $51.4 billion against $24.0 billion a year earlier, Amazon held 2026 capex guidance near $220 billion, and Meta Platforms, Inc. (NASDAQ: META) spent $34.9 billion, more than its $32.8 billion of operating cash flow. Alphabet and Meta posted negative free cash flow. 

For small caps, that budget remains the demand engine for chips, power, cooling, networking, and test equipment. Spending is diffusing beyond the platforms, but it leans on borrowed money and political permission, and second-tier enablers carry most of that risk.

Small-Cap Subsector 

Specialty semiconductors, equipment, and components remain the strongest fundamental group. FormFactor and Aehr both set revenue records on AI test demand, even as the Philadelphia Semiconductor Index fell 12% on November 5th and Advanced Micro Devices, Inc. (NASDAQ: AMD) dropped 17%. 

AI infrastructure and data center enablers took the hardest hit. After Democrats who campaigned partly on data center moratoriums won governor races in Texas and Georgia, Core Scientific, Inc. (NASDAQ: CORZ) fell 11.6% and IREN Limited (NASDAQ: IREN) dropped 12.5% on November 4. Analysts at UBS (NYSE: UBS) estimated that about 30% of expected 2028 U.S. data center capacity additions could be at risk from construction pauses. 

AI-enabled and vertical software drew private capital. CCC Intelligent Solutions Holdings Inc. (NASDAQ: CCC), an insurance claims software platform, agreed to a take-private by a GTCR-led group at $7.75 per share, an enterprise value of about $6.1 billion and a 44% premium to its unaffected price. 

Cybersecurity and data governance produced the month’s largest deal. Varonis Systems, Inc. (NASDAQ: VRNS) agreed to be acquired by privately held Proofpoint for $49.75 per share in cash, about $6.3 billion and a 52% premium to its price before sale rumors began. 

Fintech and payments infrastructure showed operating leverage, led by Sezzle’s subscriber growth and fourth guidance raise.

Quantum computing takes this month’s first rotating spotlight. IonQ, Inc. (NYSE: IONQ) reported third-quarter revenue up 336% to $173.8 million, raised 2026 guidance to $505 million to $515 million, and doubled remaining performance obligations to $1.2 billion, yet adjusted EBITDA was a loss of $133.6 million. It also raised $2.0 billion through stock and pre-funded warrants and issued warrants on 100 million more shares, a reminder that thematic valuations still lean on dilution.

Space takes the second rotating spotlight. Rocket Lab Corporation (NASDAQ: RKLB) carries a $2.36 billion backlog, yet its stock lost more than a quarter of its value after its last report as quarterly cash burn reached $110.1 million and the first Neutron flight slipped to the fourth quarter of 2026. Contracts are real; valuation depends on execution.

Capital Markets, Funding, and Liquidity

Issuance concentrated in the largest names. Anthropic publicly filed for a Nasdaq IPO on October 26th, with bankers expecting roughly $75 billion that could crowd out smaller issuers. IonQ’s raise shows growth capital remains available, at a dilution cost. Private equity remains the clearest bid for niche public software. The December Russell reconstitution used an October 30th rank day; preliminary additions and deletions arrive November 13, and changes take effect after the December 11th close. 

Policy, Regulation, and Geopolitics

Policy risk shifted from federal trade rules to state data center permitting. Democrats won both chambers of Congress, and analysts at The Goldman Sachs Group, Inc. (NYSE: GS) warned that Democratic state and local wins could temporarily halt about 45% of planned U.S. data center capacity expansion, though they expect the effect to be short-lived. Large platforms can move sites; smaller hosts with concentrated campuses cannot. No major export control, tariff, or CHIPS Act change was confirmed in the window.

Positioning, Flows, and Global Context

Flows show no durable rotation into small caps. The iShares Russell 2000 ETF posted net outflows of $2.25 billion to the end of October and $7.60 billion for the year. A softer dollar after the midterms helps smaller exporters against larger Asian and European incumbents, while sharp declines in Asian chip and memory makers showed the AI unwind was global. The move looks like a relative bounce, not a durable re-rating. 

Forward Outlook: Next 1 to 3 Quarters

In the first scenario, cooler inflation lets the Fed skip a December hike, the 10-year stays below 5%, rate cuts return to the 2027 conversation, and breadth widens toward profitable small caps. In the second, inflation holds near 3.7%, the Fed hikes, yields rebound, and leadership narrows back toward cash-rich platforms that can self-fund capex. AI themes beyond hyperscalers include test equipment, vertical software, and contracted capacity in permitting-friendly states. Risks include weak balance sheets, dilution, customer concentration, overhyped AI positioning, and a retreat into mega-cap defensives. Fundamentals are strengthening in AI test and subscription fintech, while quantum and space remain narrative driven. Watch core inflation, the 10-year yield, and state permitting.

What to Watch: Next 30 Days

Over the next 30 days, the Fed’s December decision will shape small-cap growth multiples and refinancing risk. Earnings quality matters most, judged by free cash flow, backlog, retention, and guidance credibility. Investors should watch whether AI spending reaches second-tier enablers and software vendors, which would show real breadth. Capital access will hinge on dilution, M&A appetite, and how much demand the Anthropic IPO absorbs. Semiconductor and data center demand signals, including state moratorium proposals, will test the AI buildout, and hyperscaler capex guidance will show whether spending plans rise, fall or hold.