The AI trade is back, and it's sorting software stocks into winners and losers

October was the month investors gave this year's beaten-down software stocks a second chance. Four sessions later, they're taking it back and buying cybersecurity instead.

For most of October, the trade was easy to spot: Sell chips, buy software. Through the Oct. 22 close, the median stock in a 45-stock Yahoo Finance software basket was up about 13% for the month, while the iShares Semiconductor ETF ( SOXX ) had lost about 16%.

Then the trade flipped. Since that close, SOXX has jumped about 7%, and the First Trust Nasdaq Cybersecurity ETF ( CIBR ) has gained about as much, while 26 of the 45 software stocks fell through Tuesday.

The reversal is biggest at the extremes. Palo Alto Networks ( PANW ) and CrowdStrike ( CRWD ) are up about 13% since Oct. 22, and Akamai ( AKAM ) and Cloudflare ( NET ) are up 8% to 9%. Each fell at least 10% earlier in the month.

Going the other way, Fair Isaac ( FICO ) is down about 16%, Cognizant ( CTSH ) about 10%, and Intuit ( INTU ) and HubSpot ( HUBS ) 6% to 8%. Each rallied 28% to 39% before Oct. 22. Adobe ( ADBE ), up about 13% earlier in the month, has lost about 8%.

By Yahoo Finance calculations, the third of the basket that did worst in October through Oct. 22 has gained a median 8% since. The best third has lost a median 5%.

Investors are going back to what worked all year. This week's risers are up a median of more than 40% in 2026. The fallers are still down about 9%.

Donovan Jackson, editor of the Chart Report, flagged the risk on Wednesday morning.

"The risk after a run like this is intra-sector rotation," he wrote. "Over the past few months, software and semis have behaved like two separate trades, with money flowing from one to the other. If money moves back into semis, software will likely take a backseat."

Since the Oct. 22 close, the 20 chip stocks in the S&P 500 ( ^GSPC ) have added nearly $570 billion in market value, according to Yahoo Finance calculations through Tuesday. The rest of the index lost about $40 billion.

"For now, early trading this week looks more like rotation within AI than a broad return of conviction," Vanda Research's Viraj Patel wrote Wednesday.

Software isn't breaking down. The equal-weight SPDR S&P Software & Services ETF ( XSW ) closed at a record on Monday.

Microsoft ( MSFT ), the biggest software name by market cap, reports after Wednesday's close . If its AI business keeps growing, the list of winners could get longer.

Internal AI tools helped analyze interview transcripts, research, and draft this post. Humans reviewed, edited, and fact-checked this post before publication.

Follow Jared Blikre on X @SPYJared or email him at jaredblikre@yahooinc.com.