Software sector regains ground as SaaS companies adapt AI strategies

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Software sector regains ground

Highlights

S&P 500 software sub-index has rebounded to its early-year level as SaaS companies embed AI in products and experiment with new pricing models.
Salesforce reports one of its best quarters with over $1.5 billion in quarterly AI-driven annual recurring revenue, while Snowflake's CoCo assistant adoption surpasses 9,000 accounts.
Valuations vary as Snowflake remains unprofitable with higher multiples, Salesforce and Workday trade at mid-teen earnings multiples, and Adobe lags due to generative AI competition exposure.

AI adoption supports software revenue recovery

As reported by Financial Times, the S&P 500 software sub-index has climbed back to roughly where it started the year after investors had previously sold the sector on concerns that autonomous AI agents and new coding tools could make some software products less relevant.

That rebound reflects both a reassessment of those fears and signs that software companies are adjusting their business models. Providers that sell software through subscriptions or usage-based pricing are increasingly embedding AI into customer, workflow and back-office products, while also shifting some pricing away from flat per-user fees toward charges based on the amount of work clients ask platforms to perform.

Salesforce offers one of the clearest examples of that shift. Marc Benioff says the company posts one of its best quarters ever, and AI-based tools for customer relations, workflow and other business processes generate more than $1.5 billion in annual recurring revenue in the quarter, almost a fifth of the total. Snowflake also expands adoption of its CoCo coding assistant by 2,000 accounts in the past quarter, taking the total above 9,000, while Workday says more than 5,500 customers now use its AI agents across HR and payroll functions, up by a third from the previous quarter.

Valuations and risks still divide the sector

Even with the recovery in share prices since the spring, strong intervening results mean valuations in parts of the sub-sector remain relatively contained. Snowflake stands out as an exception because it is still unprofitable and trades at a far richer level, while Salesforce and Workday, on mid-teen forward earnings multiples, appear less stretched.

Risks nonetheless persist for the sector. SaaS providers still argue that their strength lies in owning and understanding client data, but AI increasingly gives customers tools to run more of their own programs, and those that do not want to build internally can turn to smaller specialist rivals.

Performance across the industry is also becoming more differentiated. Cybersecurity groups such as Fortinet, CrowdStrike and DataDog appear best positioned to maintain outperformance, companies like Salesforce that are integrating AI into existing products occupy the middle ground, and Adobe remains about a quarter lower year to date because of its greater exposure to generative AI competition.

Our earlier coverage of broker forecasts for the S&P 500 in 2026 highlighted a wave of raised targets, with several firms projecting the index could approach or exceed the 8,000 level. We noted that strategists expect AI-driven earnings growth to support that bullish outlook, even as geopolitical risks tied to the Iran conflict keep pressure on sentiment through inflation and energy-market uncertainties.

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