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.

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.