In 2026, investors appear to be getting more cautious about companies that they think spend too much on artificial intelligence (AI) without results, and on stocks that trade at high valuations. Both of these concerns have had an outsize impact on technology stocks, particularly large caps. The large-cap tech sector is down about 3% in 2026 as of Feb. 4, which is the worst among the sectors.
The bigger concern, from my perspective, particularly as it relates to many of the large-cap tech companies, is the valuations. The inflation-adjusted 10-year Shiller P/E ratio is at its highest level since the dot-com boom, sitting at just over 40.
Image source: Getty Images.
In the past, an abnormally high Shiller P/E ratio has been a strong indicator that a market correction is coming. We aren't there yet, but it bears watching closely.
So, in 2026, investors should focus on tech stocks that are both positioned to capitalize on AI spending and are reasonably valued. Two stocks that stand out are Microsoft (MSFT 0.36%) and Oracle (ORCL 2.00%).
Why Microsoft stands out
Let's start with Microsoft, the top choice among the two stocks. Microsoft had some pullback after its fiscal second-quarter earnings in late January due to record spending on capital expenditures, mostly AI, last quarter, which was 66% higher than it was the same quarter a year ago.
NASDAQ: MSFT
Key Data Points
At the same time, growth for its AI cloud engine, Azure, slowed slightly and was guided to slow a bit more in 2026. But it is more a case of supply constraints than demand as the remaining performance obligation rose 110% to $625 billion.
The pullback is great for long-term investors because it makes Microsoft even more attractive. It is trading at 26 times earnings, which is the lowest it has been since 2022 and below the S&P 500 and Nasdaq-100 averages.
Some 95% of analysts rate Microsoft a buy, the most of any S&P 500 stock, and it has a median price target of $600 per share, suggesting 45% upside.
Oracle has huge upside, but...
Oracle stock has even higher potential upside than Microsoft, according to Wall Street analysts, with a median price target of around $272 per share, which would mean 88% upside over the next 12 months.
NYSE: ORCL
Key Data Points
Like Microsoft, it is also undervalued relative to its peers, trading at around 29 times earnings, which is near a 52-week low.
To a greater degree than Microsoft, investors are concerned about Oracle's AI spending. It announced in early February that it was raising $50 billion to build new data centers to meet its massive cloud computing demand. As of January, it had a $523 billion backlog of contracts in the pipeline, up a whopping 438% year over year. Its clients include a who's who of hyperscalers like Nvidia, Meta Platforms, and OpenAI, which inked a five-year $300 billion deal with Oracle.
But again, there have been investor concerns about OpenAIʻs ability to fund that contract, which has hurt Oracle stock a bit.
Oracle is more of a gamble than Microsoft because of the debt it is taking on and the OpenAI concentration in the pipeline, but it has a ton of upside and looks good from a valuation standpoint.
