U.S. software stocks extend gains as AI disruption fears ease

Traders Union
All News
Financial News
US software stocks reach new highs

Highlights

The S&P 500 software and services index rises 1.3% to its highest since November 2025, buoyed by improved 2026 sector earnings growth estimates at 20.6% versus 13.8% in March.
Triple-digit percentage gains for cybersecurity firms such as Crowdstrike, Fortinet, and Palo Alto Networks outpace broader sector performance as digital defense spending persists amid AI adoption.
Analysts note that near-term AI disruption fears have eased, but structural risk remains with potential pressure on traditional software models expected from AI coding tools by the second half of 2027.

Earnings outlook drives sector rebound

As reported by Reuters, the S&P 500 software and services index rises 1.3% on Tuesday to its highest level since November 2025, after recording its biggest quarterly advance in July through September since the second quarter of 2020.

Results from companies including Salesforce, ServiceNow and Accenture, together with partnerships with AI labs, help extend a recovery that has been underway since late June. LSEG data shows the sector's expected annual earnings growth rate for 2026 climbs to 20.6%, up from 13.8% at the end of March.

The shift follows a sharp selloff earlier in the year, when the software index falls more than 26% from late January to its April low in a downturn dubbed the "SaaSpocalypse". That retreat is driven by concern that companies could use AI to build applications internally at lower cost, but analysts now say those fears move ahead of the evidence.

Adam Turnquist, chief cross-asset strategist at LPL Financial, says AI has acted more as an enabler than a disruptor for many software companies. He adds that software is now retaking a leadership role in the market, with potential for stronger performance than semiconductors.

Cybersecurity leads, but longer-term risks remain

Cybersecurity names stand out in the rally, with Crowdstrike, Fortinet and Palo Alto Networks posting triple-digit percentage gains this year as companies continue to spend heavily on digital defenses in the age of AI.

The software index is up 5% in 2026, trailing the Philadelphia SE Semiconductor index, which has surged 87.5% this year but remains well below its peak. That comparison suggests investors are rotating back into software even after a stronger semiconductor run.

Rebecca Wettemann, CEO of technology research firm Valoir, says the feared software disruption does not happen nearly as quickly as some investors expect, while vendors are now reporting customer uptake as AI adoption moves beyond the experimental phase.

Even so, the sector still faces structural risk as AI evolves and challenges existing business models. Brian Mulberry, chief market strategist at Zacks Investment Management, says a more serious test for software stocks could arrive in the second half of 2027, when added data center capacity may increase the threat from AI coding tools to traditional software firms.

In our earlier article on Reflection AI’s open-weight model Beam, we explained why open, customisable AI systems are becoming a key competitive front as companies look for cheaper models they can run on their own hardware. We also noted that rapid adoption of open-weight models is raising the stakes for pricing competition among AI labs and intensifying policy scrutiny around reliance on Chinese-developed models.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.