US software stocks are experiencing a remarkable turnaround, with the S&P 500 software and services index rising 1.3% on Tuesday to reach its highest levels since November 2025. According to reports from Reuters, the sector posted its biggest quarterly jump in July-September since the second quarter of 2020, marking a significant recovery from earlier challenges. The software index has gained 5% this year, while the Philadelphia SE Semiconductor index, which houses many US chipmakers, has surged 87.5% in 2026 but is currently well off its highs. As per Reuters, the recovery has been supported by strong earnings from software companies such as Salesforce, ServiceNow and Accenture, along with partnerships with AI labs that helped fuel the sector's revival that had been underway since late June.
Major software companies have delivered impressive earnings that have fueled the sector's revival. As reported by Reuters, strong results from companies including Salesforce, ServiceNow and Accenture have contributed significantly to the recovery. The sector's expected annual earnings growth rate for 2026 has climbed to 20.6%, up from 13.8% at the end of March, according to LSEG data. Additionally, cybersecurity stocks have particularly stood out, with Crowdstrike, Fortinet and Palo Alto Networks notching triple digit percentage gains this year as companies increase spending on cybersecurity in the AI era. According to Reuters, analysts note that 'AI has been more of an enabler for a lot of these software companies, more than a disruptor', with the sector now showing signs of recapturing leadership reins in the technology space.
Market analysts are reevaluating the impact of AI on the software sector, with many suggesting that earlier fears were overstated. According to Adam Turnquist, chief cross-asset strategist at LPL Financial, as reported by Reuters, 'AI has been more of an enabler for a lot of these software companies, more than a disruptor'. Rebecca Wettemann, CEO of technology research firm Valoir, noted that 'The whole SaaSpocalypse didn't happen anywhere near as fast as some of the people on Wall Street thought it would'. However, Brian Mulberry from Zacks Investment Management warns that the real test for software stocks could come in the second half of 2027, when more data center capacity might make AI coding a bigger threat to traditional software firms. As per Reuters, analysts are now seeing 'more of a trend change now where software has recaptured the leadership reins, and we think there's a window here for outperformance in software over semiconductors'.
The software sector's recovery comes after experiencing significant volatility earlier in the year. As reported by Reuters, the software index had lost more than 26% from late January to its lowest point in April during a selloff dubbed 'SaaSpocalypse', driven by fears that companies could use AI to build applications in-house more cheaply. Analysts now suggest that these fears ran ahead of evidence, with vendors reporting customer uptake as AI adoption moved beyond the experimental stage. The sector is now showing signs of recapturing leadership reins in the technology space, with the recovery supported by strong fundamentals and strategic partnerships with AI companies. However, significant risks remain as rapid advances in AI could still reshape software business models, particularly as coding and application development become increasingly automated.
