Software Stocks Rally on AI Demand – Will It Hold?

Software stocks staged a rebound after AI-related demand lifted exchange-traded funds and corporate results, reversing losses that began with a February selloff tied to new AI plugins that erased about $300 billion in U.S. market value in a single day.

Tech-focused ETFs recovered through the summer. The iShares Expanded Tech-Software Sector ETF (IGV) moved into positive territory year to date and rose roughly 10% in the past month after a strong earnings beat from Salesforce. The State Street Software and Services ETF hit an all-time high in August and climbed about 11% in the last month and 10% year to date.

Snowflake raised its fiscal 2027 product revenue guidance to $6.07 billion from $5.84 billion and reported second-quarter product revenue growth of 37%. Sridhar Ramaswamy, Snowflake’s CEO, said the company’s AI offerings accounted for roughly half of the acceleration in revenue. Snowflake reported its coding assistant, Cortex Code, added more than 2,000 accounts to exceed 9,100, while enterprise chatbot CoWork reached about 5,800 accounts.

Salesforce raised revenue and profit forecasts and expanded its partnership with Anthropic. The stock rallied about 12% after the results. Marc Benioff rejected the so-called “SaaSpocalypse” narrative, saying nine of the top 10 AI firms use Salesforce and Slack and that customer spending on those platforms rose 435% year over year.

Cybersecurity vendors reported increased demand as companies seek to protect AI deployments. CrowdStrike beat second-quarter expectations and raised its full-year revenue outlook; CEO George Kurtz described the quarter as the company’s best and added, “Every enterprise will run on AI, and securing it is the largest market opportunity in our history.” CrowdStrike shares have climbed more than 66% this year. Palo Alto Networks executives have also pointed to firms upgrading defenses after recent AI developments.

Other enterprise software firms reported AI-driven adoption. ServiceNow raised its annual subscription revenue forecast for a second time after beating quarterly estimates and said nearly all 50 U.S. states are using its AI platform; it reported more than $1 billion in annual contract value for AI products. Workday said AI accounted for more than 25% of new annual contract value in the quarter and that more than 5,500 customers use at least one of its AI agents.

Analysts are split on the rally’s causes. Morgan Stanley cited consecutive quarters of accelerating growth as evidence of rising software consumption tied to AI workloads. Nicholas Frasse at VanEck said investors are differentiating between companies with proprietary data and entrenched workflows and smaller vendors whose products may be easier for AI to replicate. Jordan Klein at Mizuho linked part of the rally to institutional positioning, noting some funds had been underweight software and used short software positions to finance bets on semiconductors and AI hardware. Investor Dan Niles highlighted a rotation away from chip stocks toward software since late June.

The divergence between software and chip funds has been notable. The iShares Semiconductor ETF (SOXX) fell more than 7% in the last month even as software ETFs climbed, though SOXX remains up about 60% year to date. Market participants say they will watch upcoming earnings and conference-season events for clearer signals about whether AI continues to drive measurable increases in enterprise software spending.