Software Stocks Get New Life From Strong Earnings, AI Warnings

(Bloomberg) -- Software stocks were basically left for dead earlier this year as investors bet that the business was doomed by the emergence of artificial intelligence. But it turns out that imminent demise was greatly exaggerated.

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First, strong earnings provided reassurance that software firms are continuing to grow. Then, AI leaders started calling for a pause in development of their most powerful models. Taken together, it's offering reassurance that the worst-case scenario for the industry is unlikely to materialize, at least not soon. As a result, near-term sentiment is improving even as AI's arrival may have permanently altered software's long-term outlook.

"Reality has set back in and we've moved away from that worst-case scenario," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, which owns numerous software stocks. "There will probably be some disruption, especially as AI gets more powerful, but I don't think we're yet at a place where sales are completely going from traditional software to AI. I don't think people are comfortable using AI as their system of records, for example."

The biggest sign of the vibes shift is the reversal of a popular trade from earlier in the year: long chipmakers, short software.

In the first half of 2026, the Philadelphia Stock Exchange Semiconductor Index, better known by its ticker SOX, doubled in value while the iShares Expanded Tech-Software Sector ETF, or IGV, sank 14%. Since then, the SOX is down about 19% and IGV has risen 17%. The prospect of ultra-powerful AI means security software is doing particularly well, with a Goldman Sachs basket of cybersecurity stocks surging 65% this year.

An encouraging earnings season kickstarted the move, with 100% of software companies in the S&P 500 beating expectations by an average of more than 13%, according to data compiled by Bloomberg. More than 80% posted better than anticipated revenue.

The impressive reports featured firms that had faced concerns about AI-related disruption highlighting how they're harnessing the technology to improve their own products. Most notably, Microsoft Corp. had its biggest one-day jump since October 2008 after showing a substantial acceleration in cloud growth.

In addition, Salesforce Inc. shares soared more than 20%, their biggest one-day surge in six years, after the company gave a robust forecast and deepened its partnership with Anthropic PBC. Palantir Technologies Inc.'s stock jumped nearly 30% on a healthy outlook and "otherworldly" demand. Snowflake Inc. had a double-digit pop after giving a positive outlook and touting the adoption of its AI-assisted coding tool. And ServiceNow Inc. added to optimism about the potential of its AI tools, sending its stock up 45% since its report in late July.

Wall Street analysts expect the strong performance to continue. The S&P 500 Index's software and services sector is expected to post earnings growth of 13.8% in 2027 and 20.8% in 2028, as revenue also accelerates, according to Bloomberg Intelligence data.

These reassurances come as the outlook for AI hardware, including chips and other components used in the technology's infrastructure, is getting cloudy. While companies like Microsoft, Alphabet Inc., Amazon.com Inc., and Meta Platforms Inc. remain committed to spending aggressively, there's a growing backlash against data centers, vocal calls for regulation, and now active discussions about slowing development of cutting-edge AI models.

"It seems like the relative opportunity is on the hyperscaler and software side of the fence," said Uday Cheruvu, portfolio manager at Harding Loevner, referring to major cloud-computing providers like Microsoft, Alphabet and Amazon. "The companies that will get hit most are on the hardware side."

The reversal was on display Monday, the first trading day after the warnings from Anthropic PBC Chief Executive Officer Dario Amodei, OpenAI leader Sam Altman and SpaceX's Elon Musk. The software ETF soared 5%, while the chip index tumbled 5.9%, with widest performance gap in either direction on record, based on data going back to 2001.

To be sure, many investors still think chipmakers and other parts of the AI supply chain have better prospects than software providers. Based on average price targets, analysts see chip stocks rising more than 40% over the next 12 months, compared with 17% for the S&P 500 software index.

"A lot of software remains highly vulnerable to AI, especially when you factor in the quantum leaps in intelligence that are going to be coming," said Eric Schiffer, who runs the private equity firm Patriarch Organization and is shorting IGV.

Some companies, like Salesforce and ServiceNow, should navigate the transition well, albeit with some volatility, according to Schiffer, and security software firms will likely hold up despite being overvalued in the short run. Beyond that, however, the sector is going to get "crushed," he said.

"One good earnings season doesn't dismiss the long-term disruptive potential, and I don't think the pause in AI development will support software," Schiffer said. "These kinds of things may delay the reckoning, but there won't be a time out for disruption."

SoftBank Group Corp. has increased its margin loan backed by shares of its chip unit Arm Holdings Plc by $5 billion to $25 billion, according to people familiar with the matter, as the conglomerate finds ways to fund its expanding investments in artificial intelligence.

Palantir Technologies Inc. Chief Executive Officer Alex Karp said developers of artificial-intelligence systems need to be held liable for their own work as opposed to depending on government regulation.

Waymo plans to offer its robotaxi service in Singapore in 2028, the latest in a string of domestic and international expansions by the Alphabet Inc. unit.

Nvidia Corp. Chief Executive Officer Jensen Huang expects to sell twice as many chips in the coming year, fueled by the spread of artificial intelligence across different industries.

--With assistance from Subrat Patnaik, Neil Campling and David Watkins.

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